JESSICA Evaluation study for Saarland

Transcription

JESSICA
–
JOINT EUROPEAN SUPPORT FOR SUSTAINABLE
INVESTMENT IN CITY AREAS
Saarland
EVALUATION STUDY
Final Report
August 2010
This document has been produced with the financial assistance of the European Union. The
views expressed herein can in no way be taken to reflect the official opinion of the European
Union.
Evaluation study for the European Investment Bank (EIB)
Saarland Community Development Fund
Final Report – August 2010
Client:
European Investment Bank
Björn Gabriel
100, boulevard Adenauer
L-2950 Luxembourg
Luxemburg
Contractors:
Forschungs- und Informations-Gesellschaft für
Fach- und Rechtsfragen der Raum- und Umweltplanung mbH
Dipl.-Ing. Andreas Jacob
Dipl.-Ing. Christian Plöhn
Bahnhofstraße 22
67655 Kaiserslautern
Germany
Prof. Dr. Michael Nadler
Dr. Claudia Kreuz
Ziegeleiweg 36
40591 Düsseldorf
Germany
DLA Piper UK LLP
Dr. Ludger Giesberts
Dr. Maximilian Schwab
Hohenzollernring 72
50672 Cologne
Germany
KAISERSLAUTERN, AUGUST 2010
EIB Evaluation Study Saarland Community Development Fund – Final Report
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TABLE OF CONTENTS
SUMMARY
9
1
INTRODUCTION
1.1
1.2
1.3
1.4
Conditions ................................................................................................... 14
Motivation .................................................................................................. 14
Development process of the Saarland Community Development Fund .......... 15
Subject of the evaluation study .................................................................... 17
2
PLANNING/ADMINISTRATIVE REQUIREMENTS REGARDING USING JESSICA IN
URBAN DEVELOPMENT ...................................................................... 19
2.1
Integrated community development concepts .............................................. 19
2.1.1 Objectives ............................................................................................... 19
2.1.2 Action strategies ...................................................................................... 20
The Operational Programme of the Saarland (ERDF 2007–2013) ................... 22
2.2.1 Starting point ........................................................................................... 22
2.2.2 Previous ERDF funding............................................................................. 23
2.2.3 Goals/distribution of resources of the Operational Programme
‘Saarland’ ............................................................................................... 24
2.2.4 Priority axes ............................................................................................. 26
2.2.5 Coherence between the Operational Programme and the JESSICA
initiative ............................................................................................... 29
Evaluating the market for municipal and urban development projects .......... 30
2.3.1 Current financing possibilities (public and private sector) ...................... 31
2.3.2 Project managers’ financing needs ......................................................... 32
2.3.3 Addressable market failure and potential role of JESSICA instruments.. 34
2.2
2.3
13
3
LEGAL CONDITIONS FOR IMPLEMENTING THE SAARLAND COMMUNITY
DEVELOPMENT FUND ....................................................................... 36
3.1
Structural Fund Ordinances and COCOF Notes .............................................. 36
3.1.1 Reg. (EC) No 1083/2006 (General provisions on the Structural Fund
and the Cohesion Fund) .......................................................................... 36
3.1.2 Regulation (EC) No 1080/2006 (ERDF Regulation) .................................. 37
3.1.3 Regulation (EC) No 1828/2006 (Implementation Regulation) ................ 37
3.1.4 COCOF Notes ........................................................................................... 38
Operational Programme .............................................................................. 38
Budget Law of the Saarland.......................................................................... 38
Capital Market and Corporate Law ............................................................... 39
Public Procurement Law .............................................................................. 40
European Law .............................................................................................. 40
3.2
3.3
3.4
3.5
3.6
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POTENTIAL GOVERNANCE MODELS FOR THE SAARLAND COMMUNITY
4.1
Model 1: In-house Loan Fund in the MEET and MES of the Saarland .............. 43
4.1.1 Financial Analysis ..................................................................................... 43
4.1.2 Legal Analysis ........................................................................................... 44
Model 2: Loan fund in the SIKB ..................................................................... 45
4.2.2 Legal Analysis ........................................................................................... 46
Model 3: Saarland Holding Fund in the EIB .................................................... 46
4.3.2 Legal Analysis ........................................................................................... 47
Model 4: Guarantee Fund for Lending by the SIKB ......................................... 47
4.4.2 Legal Analysis ........................................................................................... 48
Model 5: Venture Capital Fund with its own Legal Personality (start-up)........ 49
4.5.2 Legal Analysis ........................................................................................... 50
Model 6: Venture Capital Fund with its own Legal Personality as a Separate
Asset of the State ......................................................................................... 50
4.6.2 Legal Analysis ........................................................................................... 51
Interim Summary of the Governance Models under Discussion ..................... 52
Implementation-orientated enhancement of the Governance Models
(“Nexthouse model”) ................................................................................... 53
4.8.1 Starting point: Proposal of MEET Saarland – In-house loan fund ........... 53
4.8.2 Demand – Which financial engineering instruments are wanted on
the ‘market’?............................................................................................ 53
4.8.3 Legal implementation issues of in-house solution .................................. 54
4.8.4 Solution proposed by consultants – Equity fund (Model 5) .................... 55
4.8.5 General solution agreed upon on 29 April 2010 – "Nexthouse" solution55
4.2
4.3
4.4
4.5
4.6
4.7
4.8
5
CONCRETE INTERVENTION POSSIBILITIES WITH JESSICA INSTRUMENTS
5.1
Identifying Business Areas of CDFs and their Significance for Urban
Development Policy ..................................................................................... 59
Evaluation Criteria in the Selection of Appropriate Starting Projects .............. 60
5.2.1 Urban development policy evaluation criteria ........................................ 60
5.2.2 Financial evaluation criteria ..................................................................... 61
5.2.3 Legal evaluation criteria........................................................................... 62
Project level (model portfolio) ...................................................................... 63
5.3.1 Fibre Optic flagship project in Dillingen................................................... 63
5.3.2 Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler .................. 66
5.3.3 Local Heating Supply project for the Community of Nalbach ................. 69
5.3.4 Spitzbunker city hotel project in Neunkirchen ........................................ 72
5.3.5 Revitalising the pedestrian precinct in Lebach ........................................ 74
5.2
5.3
59
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5.4
5.3.6 “Pipeline Projects” ................................................................................... 77
Summary overview of model portfolio ......................................................... 82
5.4.1 Initial urban development policy conclusions in regard to indentified
model projects ......................................................................................... 82
5.4.2 Initial financial conclusions in regard to the five pilot projects .............. 84
5.4.3 Legal analysis of the pilot projects .......................................................... 85
6
CONSTRUCTING A FINANCIAL MODEL FOR THE SAARLAND COMMUNITY
6.1
6.2
6.3
6.4
6.5
6.6
Capital requirement analysis at the fund level .............................................. 86
Fund accounting premises ............................................................................ 89
Results of fund calculations .......................................................................... 93
Evaluation of fund financing in regard to pursuing public sector goals at the
project level ................................................................................................ 95
6.4.1 Fibre Optic flagship project in Dillingen .................................................. 95
6.4.2 Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler .................. 96
6.4.3 Local Heating Supply project for the community of Nalbach.................. 98
6.4.4 Spitzbunker City Hotel in Neunkirchen ................................................... 99
6.4.5 Revitalisation of the pedestrian precinct in Lebach .............................. 101
Evaluation of the business activity at the fund level .....................................102
Additional opportunities to optimise future fund management ...................103
7
SUMMARY DETERMINATION OF NECESSARY IMPLEMENTATION STEPS
7.1
7.2
7.3
SWOT analysis: Added value of JESSICA instruments in the Saarland ............107
Review of advantages for various actors......................................................110
Future potential for JESSICA financial engineering instruments in the
Saarland .....................................................................................................110
Summary and recommended plan of action.................................................111
7.4
5
ANNEX 1: POSSIBLE COMPONENTS OF A BUSINESS PLAN FOR THE CDF
107
113
Purpose: Use of ERDF funding to finance projects............................................. 113
Budget and outflow of capital ............................................................................ 114
Co-financing partners, ownership structures and legal foundation .................. 114
Fund management ............................................................................................. 114
Justification for the use of ERDF funding ........................................................... 115
Conditions for the CDF to exit projects .............................................................. 115
Provisions for winding up the CDF ..................................................................... 115
ANNEX 2: KEY POINTS OF A FUNDING PROGRAMME
116
ANNEX 3: POSSIBLE STRUCTURING GUIDELINES FOR PROJECT APPLICATIONS
117
ANNEX 4: VENTURE CAPITAL FUND
118
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TABLE OF FIGURES
Figure 1 – Consulting process ............................................................................................17
Figure 2 – Structure and content of integrated community development concepts
(Source: Saarland Ministry for the Environment and Ministry of the
Interior and Sport) ...........................................................................................20
Figure 3 – Project discussions on site ................................................................................34
Figure 4 – CDF as “in-house” loan fund .............................................................................43
Figure 5 – CDF as separate SIKB asset ...............................................................................45
Figure 6 – CDF as EIB holding fund ....................................................................................47
Figure 7 – CDF as guarantee fund......................................................................................48
Figure 8 – CDF as venture capital fund (start-up)..............................................................49
Figure 9 – CDF as venture capital fund (separate state asset) ..........................................51
Figure 10 – Evaluation matrix for governance models presented ....................................52
Figure 11 – "Nexthouse" model (Step 1) ...........................................................................55
Figure 12 – "Nexthouse" model (Step 2) ...........................................................................57
Figure 13 – How the Saarland Community Development Fund subsumes the current
funding practices .............................................................................................57
Figure 14 – Implementation of the "Nexthouse" model ...................................................58
Figure 15 – Business areas of the Saarland Community Development Fund....................59
Figure 16 – Project selection process ................................................................................60
Figure 17 – Classification of projects in the business areas of the Saarland Community
Development Fund ..........................................................................................61
Figure 18 – Projects in the pipeline and their classification in the business areas of the
CDF...................................................................................................................61
Figure 19 – "Rundwies" (west of main road) and "Dillingen-Nord" (east) industrial
zones (Source: KomCon)..................................................................................63
Figure 20 – Business plan of Fibre Optic Lighthouse project in Dillingen .........................64
Figure 21 – Cash flows from Fibre Optic Lighthouse project in Dillingen (in euro)...........65
Figure 22 – Terentiushof and Wilhelm-Heinrich-Straße project in Ottweiler (Source:
city of Ottweiler)..............................................................................................66
Figure 23 – Business plan for the Terentiushof/Wilhelm-Heinrich-Straße project in
Ottweiler (in euro) ...........................................................................................68
Figure 24 – Cash flows for the Terentiushof/Wilhelm-Heinrich-Straße project in
Ottweiler (in euro) ...........................................................................................68
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Figure 25 – Breakdown of capital expenditure for the heating supply plant (in euro) .... 70
Figure 26 – Reduction in energy needs due to heating supply plant................................ 70
Figure 27 – Business plan for the Local Heating Supply project for the community of
Nalbach (in euro) ............................................................................................. 71
Figure 28 – Cash flows for the Local Heating Supply project for the community of
Nalbach (in euro) ............................................................................................. 71
Figure 29 – Planned hotel and retail usage of the Spitzbunker site (source: KomCon).... 72
Figure 30 – Business plan for the Spitzbunker urban hotel project in Neunkirchen (in
euro) ................................................................................................................ 73
Figure 31 – Cash flows for Spitzbunker urban hotel project in Neunkirchen (in euro) .... 74
Figure 32 – Capital expenditures for revitalising the pedestrian zone in Lebach (in
euro) ................................................................................................................ 75
Figure 33 – Business plan for revitalising the pedestrian zone in Lebach (in euro).......... 76
Figure 34 – Cash flows for revitalising the pedestrian zone in Lebach ............................. 76
Figure 35 – Business model of the Gesellschaft für Stadtumbau und
Strukturentwicklung (Source: FIRU mbh 2009)............................................... 77
Figure 36 – (Villeroy & Boch) Mosaic tile factory in Mettlach .......................................... 78
Figure 37 – Cooperative development model for the mosaic tile factory in Mettlach
(Source: FIRU mbH 2009) ................................................................................ 78
Figure 38 – Aerial view of construction areas in the Saarfürst Centre in Merzig
(source: OBG Projekt GmbH & Co. KG) ........................................................... 80
Figure 39 – Goldener Schwan inn in Wallerfangen ........................................................... 81
Figure 40 – Gross capital requirements of the CDF for the five pilot projects (in
euro) ................................................................................................................ 87
Figure 41 – Total cash flows from CDF for the five pilot projects (in euro) ...................... 87
Figure 42 – Cumulative net capital requirements at the fund level (in euro) .................. 88
Figure 43 – The fund structure .......................................................................................... 88
Figure 44 – Premises for fund accounting......................................................................... 90
Figure 45 – Potential fund financing for pilot projects ..................................................... 93
Figure 46 – Finance plan for the Saarland Community Development Fund, Part 1 (in
euro) ................................................................................................................ 93
Figure 47 – CDF cash flows over the entire duration of business activity (including
refinancing, default and management costs; in euro) .................................... 94
Figure 48 – Development of CDF capital (long-term funding in euro) .............................. 94
Figure 49 – Participation in the Dillingen project (in euro) ............................................... 95
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Figure 50 – Debt service coverage in the Dillingen project ...............................................96
Figure 51 – Participation in Ottweiler project (in euro) ....................................................97
Figure 52 – Debt service coverage in Ottweiler project including reinvested amounts
from one-time sales proceeds ......................................................................... 98
Figure 53 – Participation in Nalbach project (in euro) ......................................................98
Figure 54 – Debt service coverage in Nalbach project ......................................................99
Figure 55 – Participation in Neunkirchen project (in euro) .............................................100
Figure 56 – Debt service coverage in Neunkirchen project ............................................ 100
Figure 57 – Participation in Lebach project (in euro) ......................................................101
Figure 58 – Debt service coverage in Lebach project ......................................................102
Figure 59 – Finance plan for the Saarland Community Development Fund, Part 2 (in
euro) ..............................................................................................................102
Figure 60 – Cumulative fund cash flows over the entire duration of business activity
(in euro) .........................................................................................................103
(alternative scenario 1: Reduction of management fees to 1.50%; in
euro) ..............................................................................................................104
(alternative scenario 2: extending loans to projects, management fees
1.50%; in euro) ..............................................................................................105
Figure 63 - Cumulative fund cash flows over the entire duration of business activity
(alternative scenario 3: investing venture capital (equity) in the projects,
management fees 1.50%; in euro) ................................................................106
Figure 64 – Comparison of nominal capital preservation in four scenarios for the
CDF.................................................................................................................106
Figure 65 – Additional steps to implement discussed model for the Saarland
Community Development Fund ....................................................................112
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SUMMARY
The introduction of the JESSICA initiative marked a change in the way the European Commission offers financial aid. In future, European funding shall no longer be handled as so called “lost subsidies”
alone but shall also include revolving financial engineering instruments (loans, guarantees and equity). The structural funding granted through the new financial engineering instruments is collected
together with its co-financing in an urban development fund (UDF) and granted to individual projects
by the UDF managers. The repayments generated from the project flow back into the fund, which
can then use this money to grant new aid.
The development and implementation of UDFs in the EU Member States is actively supported by the
European Commission and the European Investment Bank (EIB). The EIB acts as a multiplier in this
process, enabling the rapid connection between the European Commission and the national administrations, bringing in its own know-how and also offering financial support. Moreover, it can be
commissioned to manage a holding fund.
When compiling the Operational Programme ‘Saarland’ for the European Regional Development
Fund (ERDF) 2007-2013 structural aid programme period, the Saarland had the option of using
JESSICA financial engineering instruments and included them in the programme. At the end of 2008,
the Ministry for the Environment requested the EIB to commission this evaluation study, which was
tendered and contracted at the start of 2009 and paid for by the European Commission. After the
Saarland’s state elections in 2009, the use of the JESSICA instruments was then included in the coalition agreement of the new government.
The use of a community development fund (CDF) to support the municipalities and municipal companies of the Saarland with the appropriate JESSICA financial engineering instruments shall meet the
challenges raised by demographic, economic and social structural change. The development process,
led by the Ministry of the Environment, involved the EIB, the commissioned expert consortium of
FIRU mbH – Prof. Nadler – DLA Piper, as well as representatives of the Ministry for Economics and
Science, the Ministry for Finance, the Association of Municipal Councils of the Saarland, the LEG Saar
Landesentwicklungsgesellschaft mbH (LEG Saar), the Saarländische Investitionskreditbank AG (SIKB)
and KomCon.
The areas of intervention for future CDFs were to be chosen based on prior studies in the area of integrated community development concepts and on circular land use management (REFINA) and – to
compensate for the current focus of European funding on urban areas – concentrated on urban agglomerations and rural areas. It was not possible to rapidly implement the CDF at the end of 2009 to
ensure access to the ERDF funding under the N+2 rule because the Saarland was unable to provide
the necessary co-financing. Therefore, this evaluation study also had to be adjusted to reflect the
new conditions for implementation at the end of 2010.
Based on these conditions, the guidelines of administration and spatial planning were examined to
determine the practicability of using the JESSICA initiative and the market for such municipal and urban development projects was evaluated. After looking at the legal conditions for the implementation process, several governance models were developed and examined, projects which could be
funded by CDF were identified and, based on these, financial funding models were developed in co12.8.2010
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ordination with the steering committee. A summary of the added value was drawn up which details
the potential of a Saarland Community Development Fund and, finally, a concrete action plan for implementing the fund was added.
The market for urban and municipal development projects in the Saarland is quite difficult. Municipal
budgets are extremely tight; in many cases, the municipalities must respect an enacted restriction of
their room for manoeuvre. It is even difficult to make a (public) investment when other public sector
bodies have approved funding to great extent because it is not possible to delineate each body’s
share of the overall financing. Although there is still private investment, this is mainly targeted on the
parts of the project which generate returns and is almost entirely focused on the few stably developing regions. Therefore, the demand side (project actors) has been substantially oriented toward subsidisation. However, the chances of correcting the current market failure by using the revolving funding instruments of a CDF are not small. It would thereby be possible to help financially where offered
aid has to be co-financed on the one hand and, on the other, where pure subsidisation would not be
of any further help to existing project types. At the same time, it might induce additional private investment in the area of urban development (leverage effect, also due to the improving image).
A slew of legal conditions have to be considered when planning the implementation of a CDF. If ERDF
funding and its co-financing are deposited into a CDF, their use is subject to the provisions of European law. The principle regulations among them are the restriction to the goal of “regional competitiveness” (§ 5 of Regulation (EC) No 1080/2006), the connection to “sustainable urban development”
(§ 8 of Regulation (EC) No 1080/2006), and the requirement to spend it within two years after the
end of the programme period (N+2 Rule in accordance with § 93(1) of Regulation (EC) No
1083/2006). Furthermore, each Operational Programme for the use of the ERDF funding in that programme period further limits the areas of application of the CDF. The financial regulations of the
state and any municipal financial restrictions are also relevant. Lending must follow the regulations
of the German Banking Act (KWG) and other capital market and corporate law provisions might play
a role in individual cases. Furthermore, the implementation of the CDF has to follow the regulations
for granting and using public aid.
For the administrative structure of the CDF, several different governance models were evaluated
from the financial and legal perspective. Given the substantial exclusion criteria, two different models were found practical: “lending with a banking licence” and “autonomy of the fund management”.
The first reflects Model 2 presented in the study, in which the fund is placed within a financial institute and loans are granted, while the second is seen in Model 5, where the state establishes an independent investment fund company which grants equity. For implementation in the Saarland, a mixed
model was developed, the so called “Nexthouse” model. The initial implementation step follows that
of Model 5, whereby the funding is only granted as dormant partner’s interests. A second step follows, when a private partner with a banking licence joins the investment fund company per tender
procedure in accordance with the KWG. The CDF is then also able to grant loans.
Based on the integrated community development concepts underlying CDF funding, the business areas “Urban Development”, “Local Business”, “Infrastructure and Environment”, and “Brownfields”
were developed and potential pilot projects identified or collected for keeping in a pipeline of future
projects. The five pilot projects identified – the Fibre Optic flagship project in Dillingen, the Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler, the Local Heating Supply project in Nalbach, the
Spitzbunker Urban Hotel project in Neunkirchen and the Revitalisation of the Pedestrian Zone project
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in Lebach – were classified in terms of urban development policy and analysed from the financial and
legal perspective. They represent types of projects commonly found in the communities of the Saarland and which are typical examples of market failure:
•
Investment in telecommunication infrastructure, esp. in rural areas
•
Energy-conserving renovation, enhancement of energy efficiency – use of renewable energies
•
Renovation of municipal centres to improve the area’s image and boost business
•
Strengthening local business and ensuring the functionality of municipal centres
•
Development of large brownfields important to the federal state
•
Development of scattered, small brownfields
All the starting projects identified feature low returns, so they represent the classic B-list projects.
A number of assumptions were made to calculate the financial model:
•
All projects will be completely or partly funded by dormant partner’s interests from the CDF.
The interest will be 2.0% p.a. plus participation in profits.
•
The CDF begins operation at the end of 2010 and holds EUR 30 million, composed in equal
parts of ERDF funding, interest-free co-financing from the Saarland and cheap loans from the
Council of Europe Development Bank (CEB)1. To be able to show the full spending of the
funding with only five pilot projects, a repeated examination of the projects was compiled
(over four to five cycles).
•
During short periods of peak demand, loans at 5.0% p.a. can be drawn on, with the newly
available resources being reinvested at an interest rate of 2.0% p.a.
•
The CDF operates for 22–23 years.
•
The management costs are 3.0% of the granted equity.
If the CDF grants the selected projects dormant partner’s interests at an interest rate of 2.0% and
there is a participation in profits at the end, once the 23 years have passed and the capital granted by
the CDF has been repaid, then 101.4% (EUR 20.42 million) of the deposited capital will have flowed
back into the CDF. Looking at the possibilities for optimising fund performance, reducing the management costs to 1.5% (administrative expenses for dormant partner’s interests are not very high)
means a return of EUR 26.56 million (capital growth of 0.9% p.a.). Considering the later use of loans
and perhaps even equity, the results from these projects would change as follows: Keeping the reduced management costs, the granting of loans for the existing project portfolio would bring returns
of EUR 25.91 million and the use of equity would bring EUR 25.53 million. Thus, all variations make
nominal maintenance of capital possible under the given assumptions.
It follows from the results of this calculation that it makes sense to set up a CDF for the Saarland to
promote an integrated community development. Even in times when budgets are tight, there are alternatives for funding the important project types in critical urban development business areas
1
See Chapter 6 for the exact interest rates.
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where the existing practice of financial contributions is out of the question. The business activities of
the CDF are centred on the Saarland’s central urban and community development problem areas (revitalising urban centres with functional problems, investing in technological, future-oriented infrastructure to handle demographic and economic change, mobilisation of potential for tourism, restructuring urban problem areas and active brownfield redevelopment). Furthermore, the additional
capital contributions from the CEB make it possible to promote projects in full and in part which
would not be possible under ERDF conditions, thereby overcoming certain hurdles and actively generating and exploiting synergies. At the same time, Nexthouse is an implementation model which is
quick, limits administrative and restructuring expenses and maintains the Saarland’s influence on the
use of the resources in the Saarland Community Development Fund for another. The Saarland has already resolved to take the first implementation step: the CDF should be established by the end of
2010 as a subsidiary of the state-owned LEG Saar and dormant partner’s interests should be granted
to projects eligible for funding.
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1
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INTRODUCTION
The Joint European Support for Sustainable Investments in City Areas – JESSICA initiative – was called
to life in 2006 by the EU Commission at the start of the 2007–2013 structural programme period and
creates new possibilities for funding urban development projects using ERDF resources. This initiative
should make it possible for European Structural Fund resources to be allocated in urban development projects during the 2007–2013 programme period using revolving financial engineering instruments (loans, guarantees and equity capital), too. Before that time, subsidies were the primary funding mechanism. Before the new financial engineering instruments are used, the Structural Fund resources are collected (together with national co-financing) in an urban development fund (UDF),
which then allocates the funding to projects in the appropriate form. As the resources return, in the
form of interest, fees and capital gains, they can again be used to promote other urban development
projects.
There were many reasons for creating such an initiative. On the one hand, it was clear to the EU
Member States that the great expansion of the EU in 2004/2007 would shift the focus of European
funding policies from the ‘old’ Member States (EU-15) to the new ones, since there was and still is
greater need for structural funding there. This means that the so called net contributors among the
Member States will receive less and less European funding. The idea of funding via UDFs makes it
possible to ensure that European money continues to flow into sustainable urban development over
the long term without being reliant on EU funding during the coming programme period. On the
other, when public resources are scarce, other paths must be taken to make the necessary investment in urban development. The JESSICA initiative makes it possible to involve private investors in
what have so far been typical public projects without having to hand over to private individuals the
responsibility for services of general interest. Given the present financial and economic crisis, this is
especially important, since municipalities are currently focussing their expenditure on co-financing
measures according to the economic stimulus packages I and II.
The Implementation of the JESSICA initiative in the EU Member States is being jointly promoted by
the European Investment Bank (EIB) and the European Commission (Directorate General for Regional
Policy). The EIB provides financing and know-how for the implementation of UDFs and conducts
evaluation studies at the request of European regions. It can also contribute co-financing for the
ERDF funding deposited in the UDF and manage a holding fund responsible for several UDFs.
At the start of the programme period, many EU Member States set about implementing UDFs for the
first time. In Germany, the Federal Ministry of Transport, Building and Urban Development supported this process with its ExWoSt field of research, “UDFs in Germany” in selected pilot projects in
four states (Brandenburg, Hamburg, North Rhine-Westphalia and Rhineland Palatinate) and the KfW
development bank. Other EU Member States initially concentrated on setting up so called holding
funds to feed several UDFs (with diverse spatial and/or thematic focuses) and still do so. With the exception of Brandenburg, so far the British region of East Midlands is the only place where a UDF has
been set up2.
2
As at 12 March 2010 (Jessica Networking Platform in Brussels).
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The planned use of new financial engineering instruments requires a general change in thinking
about funding in practice. By making funding available as loans, guarantees and equity, only certain
urban development projects can be implemented, since the funded projects have to generate revenues. Although the projects to be funded need not be named at the start of a UDF, a business plan
does have to be developed which clearly shows sustainable land development and a forecast capital
return. The project actors on site and the participating authorities both have to prepare for that.
1.1 Conditions
Around Europe, 19 Member States are currently working on developing JESSICA financial engineering
instruments and, at the start of 2010, EUR 1 billion was already contractually committed across the
continent. As few steps toward the practical implementation of the JESSICA initiative have actually
been taken, there are still several open questions. The fundamental differences in financially supporting projects under the JESSICA initiative instead of subsidisation have considerable implications
for project procedures and organisational forms. It is not yet possible to see a complete overview of
the implementation process, since no UDF has yet been fully implemented and put into practice.
1.2 Motivation
The greatest challenges for the Saarland communities currently revolve around the changes to
demographic, economic and social structures and the repercussions of climate change. To react appropriately, and ensure sustainable development for future generations, the municipalities have to
pursue integrated urban development policies which involve new governance and financing structures. For this reason, the Saarland Ministry of the Environment supported and still supports the
conception of integrated urban and community development strategies; guidelines for this were
compiled in 2008. These strategies formulate goals and measures for municipal development in the
business areas of "Urban Development and Housing", "Social and Educational Infrastructure", "Local
Business and Supply" and "Technical Infrastructure, Transport and the Environment".
One essential element of integrated urban development is purposeful circular land use, on which a
study has already been prepared in reference to the Saarland (REFINA). One result of this study is the
recommendation to set up a public property fund to best link up the available resources and contribute meaningfully to their utilisation.
Against this backdrop, the Saarland Ministry of the Environment requested the European Investment
Bank (EIB) to commission the compilation of this evaluation study regarding setting up a Saarland
Community Development Fund (CDF) following the principles of the JESSICA initiative. The CDF
should be designed to support integrated urban development projects through loans, guarantees
and/or equity capital and thereby ensure returns and the reiterate utilisation of European aid (revolving financial engineering instruments). The fund should support the widest possible spectrum of
business areas to allow a balance between the more or less profitable areas. Furthermore, the business areas should be aligned with the strategies of the integrated community concepts and also
cover the range of activities of a public property fund.
As part of the Operational Programme ‘Saarland’ for the use of ERDF resources in the 2007–2013
programme period, the Saarland allocated around EUR 35 million of European aid to the issue of sustainable urban development (priority axis 3). Depending on the decisions around and development of
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the large "Stadtmitte am Fluss" project, part of these resources could be channelled into an urban
and community development fund, because the option to use revolving financial engineering instruments in Operational Programmes following the principles of JESSICA has been stipulated. The fund
should thus be explicitly focussed on the more rural areas, so that this region receives European
funding to compensate for the urban activities in the large “Stadtmitte am Fluss” project.
After the initial phase in 2009, when the feasibility was evaluated and pilot projects were sought, the
CDF was to be implemented in 2009 followed by a model phase until 2013, also in order to secure
the ERDF resources normally outflowing at the end of 2009. Due to the changes in the political environment after the Saarland elections in summer of 2009 and the related administrative restructuring,
this was no longer possible. The evaluation study was therefore redesigned to examine a later starting point for the CDF at the end of 2010 (also in terms of project selection). The CDF shall represent
the fundamental financing base for integrated urban development in the Saarland in future; its establishment was approved in the coalition agreement of the new government of the Saarland.
1.3 Development process of the Saarland Community Development Fund
The development process of the CDF has primarily been managed by the Saarland Ministry for the
Environment (herein MfE), renamed the Ministry for the Environment, Energy and Transportation
(herein MEET) in October 2009. Other important participants in this process have been the Saarland
Ministry of Economics, Science and Agriculture (MESA), renamed the Ministry for Economics and Science (MES) in October 2009 as the ERDF administrative authority, the Saarland Ministry for Finance,
the Association of Municipal Councils of the Saarland, the SIKB, the LEG Saar as well as the KomCon
consulting agency. After conducting a tender procedure, the EIB chose the consulting expert consortium FIRU mbH – Prof. Dr. Nadler – DLA Piper and commissioned it to carry out this evaluation study.
Together with the MEET and the LEG Saar, the consultants organised regular meetings of the steering
group as well as smaller working groups focussed on particular issues.
The submission of this evaluation study should clarify for the state administration of the Saarland the
possibilities for implementing a CDF and its chances of success, as well as showing the additional
steps necessary to enact one. In addition to identifying projects which might benefit from CDF funding, the planned funding has been evaluated from a financing perspective and several implementation structures are proposed and legally evaluated herein3.
In March 2009 work began ambitiously on the evaluation study. Collecting the data needed to determine the potential of projects funded by the UDF proved to be a difficult process, since many of
the proposed project ideas were not developed enough to have sufficient information available. After putting together a rough portfolio of possible projects for the CDF in summer/autumn of 2009,
the KomCon carried out the intensive process of further developing the ideas behind these identified
pilot projects. When no secured source of capital for deposit into the CDF had been identified by the
end of 2009, the financial evaluation of the CDF was examined in winter/spring 2010 and the neces3
At the same time this evaluation study was being developed, an expert opinion was prepared on the legal questions
arising in regard to the implementation process of urban development funds in Germany. The steering group of the
Saarland was actively involved in compiling this opinion by analysing which legal questions were actually relevant and
forwarding these to the experts and the European Commission for consideration and response. The responses were
integral to the direction taken in this evaluation study.
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sary and possible governance structure for implementing the CDF were developed. The following
conditions were decisive for this development process:
1. At the start of the project, the primary guidelines given (though not set) for the planned CDF volumes by the MfE were EUR 4.8 million in ERDF funding from priority axis 3 plus EUR 4.8 million in
co-financing from the Saarland and/or loans from the SIKB. Since it was not possible to raise the
co-financing by the end of 2009, there was also no chance to commit the corresponding ERDF
funding.
2. The search for appropriate projects was in line with this fund volume and with the additional
guideline from the MfE that the CDF only lend to municipal project partners.
3. The municipal elections in June 2009 complicated the communication with municipal contact
partners, since they were often unavailable during the election campaign period until the start of
July. The Saarland elections in September 2009 also entailed the difficult process of setting up a
new government as well as restructuring the ministries and their responsibilities until the end of
November 2009.
4. At the start of the development process, it was planned to assign personnel at the MfE (using national urban development policy funding) and LEG Saar (at its own cost) with the responsibility of
determining the market opportunities and identifying projects. This did not happen at the
MfE/MEET in 2009; the part-time individual at the LEG Saar was not actively involved in working
on the project. This is why KomCon was commissioned at the end of 2009 to analyse the quality
of the identified pilot projects in regard to potential CDF funding.
5. The REFINA programmes (LEG Saar) on which the implementation process was originally based
on could not be used for project identification.
6. Notwithstanding points 1 to 5, the consultants put together their own projects whose content
and practicality were immediately approved by the steering group. By the conclusion of this
evaluation study, however, neither the Saarland nor the LEG Saar had reached any decision.
7. The steering group quickly recognised the problems of the ‘loss’ of the ERDF funding at the end
of 2009 according to the N+2 Rule and prepared a discussion on these problems with the State
Secretary’s office in April 2009, but this did not take place. Between October and December
2009, the short-term establishment of a CDF as a separate accounting entity in the Saarland
budget was discussed to ward off the risk of losing the ERDF funding. In the end, these efforts
were not successful.
8. The use of subsidies and the administration of municipal participants in the implementation of
the economic stimulus packages I and II also had a significant influence on the entire process.
9. At the start of the development process, the Association of Municipal Councils of the Saarland
pointed out how much in debt the Saarland municipalities are and how much of their budgets
are subject to legal supervision, which was reflected in the highly limited willingness of the responsible municipal parties to look in depth at new financial engineering instruments.
10. No capital could be planned for deposit in the CDF in 2010; the MEET was unable to commit any
more of its own capital. In the middle of March 2010 the CEB offered a loan of EUR 10 million.
Therefore, the following observations are based on a virtual model constructed at short notice.
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All of the points mentioned above had a direct influence on the process of identifying and qualifying
pilot projects, the precision and bindingness of financing models and the relevant governance models
to be discussed. Therefore, the results of this study show the Saarland the additional steps for implementing the CDF.
1.4 Subject of the evaluation study
Along the lines of the approach taken in other, similarly structured evaluation studies, this study
looks at the conditions for implementing a community development fund or CDF in the Saarland. It
also makes concrete suggestions for the following implementation process and lays out the next
steps for this.
The basis for the evaluation study was the identified projects, which were reviewed and evaluated as
a proxy for their project types in each business area of the CDF. Then this combination of more or
less profitable projects and their impact on the business development of the CDF was analysed from
the financial perspective. Finally, diverse implementation models were discussed with the parties involved and further development steps were formulated.
As part of the development process, the steering group met a total of six times, as well as carrying
out several discussions in smaller working groups or on site. An overview of these meetings and discussions can be found in Figure 1 below.
Dates
Meeting of the steering group or working group
02.03.2009
Steering group: Presentation of the consultants
31.03.2009
Working group: Discussion of potential pilot projects
16.04.2009
Discussion with KomCon regarding proposed potential pilot projects
29.04.2009
Steering group: Update on project search, discussion about financing possibilities
of the CDF
22.06.2009
Steering group: Discussion about involvement of SIKB
15.07.2009
Working group: Discussion about project proposals generated by consultants
(Mettlach site development company)
30.07.2009
Steering group: Decision on project portfolio, discussion about national cofinancing of ERDF funding
15.09.2009
Steering group: Financial evaluation of pilot projects, discussion about national cofinancing of ERDF funding
15.09.2009
Working group: Discussion about fund management and implementation process
20.11.2009
Steering group: Recommended actions for rapid implementation of the CDF
29.01.2010
Working group: Coordination and scheduling of activities in 2010
22.02.2010
Working group: Discussion about governance models
29.04.2010
Steering group: Discussion about final report
Figure 1 – Consulting process
The original tender for this evaluation study further stipulated an overview of the initial phase of actual implementation of the CDF, including a description and future projection of the implementation
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action plan, an evaluation of the first transactions and financing activities of the CDF and identification of the necessary technical assistance and advisory services. Given the conditions described in the
previous chapter (particularly the fact that the CDF has not yet been set up) it was only possible to do
this to a very limited degree in this evaluation study.
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PLANNING/ADMINISTRATIVE REQUIREMENTS REGARDING USING JESSICA IN URBAN
DEVELOPMENT
This chapter takes a closer look at the planning and administrative requirements regarding urban development projects and the use of JESSICA financial engineering instruments. In 2008, the Saarland
encouraged communities to develop integrated community development concepts which would
guide and lead the development of the communities over a period of around 15 years. In this regard,
a set of guidelines was prepared which listed the methods and content to be focused on when drafting the integrated community development concepts. The Operational Programme ‘Saarland’ for the
ERDF 2007–2013 programme period sets the areas of application for the structure fund resources
provided by the EU and allows the use of JESSICA financing instruments.
2.1 Integrated community development concepts
The integrated development concepts are meant to react to the impact of societal megatrends and
meet new challenges. The Saarland faces enormous demographic change and will presumably lose
one fourth of its population by 2050, while the average age simultaneously rises steeply. Globalisation and its side effects reinforce changes to the economic structure. This is accompanied by social
change, which quickly alters the demand for housing or infrastructure facilities and creates new social problems. The repercussions of climate change alter the conditions for all economic and social
activities and demand that municipal facilities be adapted accordingly.
2.1.1
Objectives
An integrated community development concept represents a comprehensive approach to formulating adaptation strategies for all areas of municipal development. It is a planning instrument with a
timeline of 15 years which arranges public and private plans into one regional and urban context,
while at the same time taking on a steering and controlling function. It demonstrates how synergy effects can be fostered within and between communities through the optimal use of scarce resources.
The integrated community development concept therefore follows the overriding principles listed
below:
•
Interdepartmentally integrated approach
•
Adaptations tailored to meet needs of demographic change
•
Inter-municipal cooperation
•
Public participation
•
Sustainability
One ideal example of the structure of the concept development process can be found in Figure 2. Inventory is taken to determine the starting conditions in each municipal business area. After an analysis of strengths and weaknesses, a model for future development is designed and appropriate objectives are formulated. Then action strategies are developed, from which action steps (incl. describing
the general and specific implementation modalities) are derived. The complete process should be
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supported by a steering committee which encompasses all fields and government agencies, though
the coordination and steering should be in the hands of the highest administrative level.
Figure 2 – Structure and content of integrated community development concepts (Source: Saarland Ministry for the Environment and Ministry of the Interior and Sport)
The content of the integrated community development concepts should also meet certain criteria.
Regarding the problems of demographic change, it should include key information such as the compilation and evaluation of population and aging forecasts, the need for municipal facilities and building
vacancy figures, as well as the coordination of infrastructure planning with neighbouring communities. In accordance with the innovation strategy of the government of the Saarland, it should support
the so called "accelerating factors" (education and research as motors for innovation, more entrepreneurial spirit and company formation, cooperation and transfer of innovation, ability to compete
on international scale). In reference to the 2008 climate protection concept, it should also deal with
tasks in pursuit of environmental education, promotion of photovoltaic energy, making buildings
more energy efficient, spreading this to non-public buildings and forming local climate alliances.
2.1.2
Action strategies
The content of integrated community development concepts is aligned toward the following action
strategies. It could make sense, however, to supplement these with additional development concepts for only part of the area or specific technical concepts.
2.1.2.1
Urban planning and housing
In view of the changing demand for housing, the consideration and evaluation of building structures
form the basis for the identification of new construction, restructuring and dismantling potential in
the community. The quality of the surroundings, recreational spaces and design are also relevant, as
living spaces and high-quality building culture determine the appearance of communities and increase life quality. Here the attractiveness of centres and inner cities is the focus of sustainable and
future-oriented community development.
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The key to the situation of centres and inner cities is the quality and function of their planning and
design. Given the current development trends and ongoing efforts to revive local centres, new proposals should be worked out and converted into projects. Moreover, this business area also covers
the topic of housing. Housing projects may not have been eligible for funding in the 15 "old" EU
Member States according to the former JESSICA funding guidelines. The recent decision of the Coreper on 23 December 2008 stipulated that ERDF resources may also be used for improving the energy
efficiency of existing housing. Furthermore, it is possible to finance interim property acquisition for
the regulated development of a housing district, which is an integral component of this business
area, through urban development funds. It is (currently) not possible to use JESSICA resources to
fund any other housing projects.
2.1.2.2
Customising social and education-related infrastructure
Many municipal infrastructure projects are set for the long term and can therefore not react (by restructuring or demolishing) to problems which arise in the short term, such as the increasing population loss in many communities. Given demographic trends, communities have to support familyfriendly structures on the one hand and face the challenges of an aging populace on the other.
Investment projects in social infrastructure – that is, in public amenities and parks and recreational
spaces – cannot simply be planned long term but must also be "demographically aligned" and support multifunctional usage by diverse target groups. For one, they should allow more than one use
over the course of the day (e.g. a kindergarten which is available in the evening for cultural events
and on the weekends for church services). For another, it should be simple to completely repurpose
a building when needs change (e.g. rebuilding a day care centre into a retirement home).
Projects in this business area include facilities for child care and education, adult care, recreation/play/sport, health and administration/security. The special needs of specific target groups (children/youth, seniors, socially disadvantaged, immigrants) should also be dealt with. In this regard, already existing real estate in the utilisation stage could be supported long-term by the fund.
2.1.2.3
Local business and local supply
Securing and creating jobs and maintaining the buildings of companies based in the community are
fundamental tasks of the community independent of the expected demographic trends. In the scope
of integrated community development concepts, the most important structural features and development potential, and obstacles, are determined and the goals and starting points for each community's business development policy are defined.
Projects in this business area are primarily focused on using the commercial development potential
in the communities. This means the provision and release of commercial space reserves, the revitalisation of brownfields and the use of a sector's potential and each site's unique qualifications. They
also serve as starting points for promoting local business and improving the availability of qualified
workers. Moreover, they should secure the long term local supply in the geographical area. This
business area therefore also includes mostly non-property-related activities as well as brownfield
projects, which results in some overlap with the business area of "land funds" (see below). It might
be possible to unite these two business areas.
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2.1.2.4
Technical infrastructure, transportation and the environment
Similar to the situation for social infrastructure, demographic trends are expected to create the same
challenges and problems for the technical infrastructure. Networks and capacities can only be adjusted to current and fluctuating needs to a minor extent and the high fixed costs for operation and
maintenance do not change according to demand. Projects in this category must focus on the technical and economic optimisation of utilities for supply and removal (gas, water/wastewater, electricity
and telecommunication). In this regard, the efficiency of energy and resources and the use of renewable energies play an important role. More radical changes to the plants and pipe systems require
long-term planning. Transportation measures also contribute strongly to life quality (business area
1), though it is primarily possible to improve the attractive of the public transportation and its local
accessibility (foot and bike paths).
2.2 The Operational Programme of the Saarland (ERDF 2007–2013)
2.2.1
Starting point
The Saarland is facing the impact of demographic change to a strong degree. The population has
been shrinking for decades and will continue to do so in future, as the birth rate is well below the
population replacement level and, at 1.2, is the lowest in all of Germany. At the same time, the average age and life expectancy continue to rise.
The secondary sector, primarily the steel industry and car production, make up a large part of the
Saarland’s economy, which has grown better than average in the last few years. At the same time,
the number of plants has diminished, especially smaller ones. In contrast, the greatest positive balance between business registrations and deregistrations has been seen over the last few years,
whereby the main reason for this record is the number of registrations among the smallest group of
businesses. The unemployment rate has been above the national average for a long while now.
The intensity of research in the Saarland is still well below that of the nation. Two reasons for this are
the fact that the business sectors in the Saarland have little need for it and there are few company
headquarters located here, and that is where the research departments are typically based. The
Saarland's innovation strategy aims to set up competence networks (clusters) in the sectors of automotive, energy, IT, "biocom" (nano- and biotechnology) and logistics, all of which are to be interlinked through one knowledge cluster.
In regards to the urban perspective, the Saarland is in a special situation. In addition to the sole regional centre, the capital city of Saarbrucken, there is a series of medium-sized centres, though all of
these have fewer than 50,000 inhabitants. Furthermore, the urban structure is polarised between
the centres in the Saarbrucken conurbation tied to the coal and steel industry and the more rural
centres in the northern part of the Saarland. Social problems primarily arise in the Saarbrucken metropolitan area (unemployment, crime, social distinctions). The ratio of immigrants to non-immigrants
is below the national average. With the exception of a few neighbourhoods in Saarbrucken, Neunkirchen and Völklingen, there are also no extremely high concentrations of foreigners in single
neighbourhoods in the Saarland.
Companies' investment in construction is primarily dependent on the immediate availability of developed commercial and industrial land; critical factors in this regard are disturbances from more
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traffic and from production-related noise. Against this backdrop, the Saarland's efforts to revitalise
land and abandoned industrial sites are viewed positively.
2.2.2
Previous ERDF funding
Part of the basis for planning the 2007–2013 Operational Programme are the results of the former
ERDF funding. These are based on the updated half-time evaluation of the Objective-2 programme
2000–2006, the 2005 annual report and, due to including the content of the URBAN community initiative in the goal "Regional competitiveness and employment", the 2005 annual report of URBAN
2000–2006, which should be integrated in future into the goal just named. Within the scope of funding Objective-2, the Saarland received European Structural aid during the 2000–2006 programme period totalling around EUR 178 million (ERDF and ESF).
Using the structural data, the half-time evaluation, which is an important component for checking
the results of EU Structural Fund intervention, proves that the Objective-2 area, and particularly the
Greater Saarbrucken Area still shows considerable structural weaknesses. Point 1 "Modern infrastructure – Capable business" funded several practical business and tourism infrastructural projects
important to structural policies, the strengthening of technological transfer between science and
business, and environmental projects to support sustainable development. Point 2 "Restructuring
business – Alternatives to coal and steel" encompassed the funding of commercial businesses, including start-ups, of technology for SMEs, of commercial tourism and of one ESF measure. Once the
European Union named "sustainable urban development" as one focus of structural policies at the
end of the 90s, the funding of disadvantaged urban areas was introduced to Point 3 "liveable urban
structures" for the first time. This includes innovative approaches to funding urban problem areas
within the scope of integrated concepts. The "support of disadvantaged urban neighbourhoods"
measure was provided with EUR 15.893 million and linked contextually and financially to the "Integrated urban development programme for urban problem areas in Saarland – City Vision Saar".
The update to the half-time evaluation made important recommendations which already set the
course for future EU Structural Fund programme periods:
•
The funding of the entire research and development area should continue at the same high
level; so far this funding area has made an extraordinarily important contribution to achieving the primary goal of the programme, the achievement and shaping of regional structural
change.
•
The funding of infrastructure – commercial areas, transportation infrastructure, tourism infrastructure – also made a positive impact. The large projects still in conception should be
implemented without delay.
•
Given the limited demand for it, the funding of SMEs had only yielded average results. Efforts
should continue to be made to use the available resources to fulfil their purpose because this
has a twofold effect: For one, it supports the investment activities of SMEs; for another – and
this is important from the structural policy perspective – the measure triggers innovation
processes and the foundation of new companies, which together strengthen the competitiveness of medium-sized companies in the Saarland.
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•
The aim is noticeable improvement in the living and housing situation in the programme areas being funded. Innovative projects – investment measures flanked by social activities –
have been the impetus for boosting motivation to see that the neighbourhoods thrive over
the long term. The projects also benefit strongly from being incorporated into overall urban
development projects.
•
One important criticism of the implementation of the Objective-2 programme to date is the
insufficient involvement of women. They enjoy fewer of the benefits of the programme, especially the creation of new jobs.
The results of the updated half-time evaluation of the 2000–2006 Objective-2 programme show that
there is a need for structural policy intervention beyond the program period. To prevent potential
disruptions and overcome the outstanding or foreseeable structural distortions, the region continues
to need outside support to be able to advance its further development. In addition to the concentrated implementation of the innovation strategy developed for the Saarland, which is the key to
mastering the structural change, two issues will play an important role in future: strengthening the
corporate sector and the sustainable upgrading of locales.
In terms of specifying the instruments to be used, it has been determined that the previous spectrum
of funding has proven successful, though it should be augmented and rounded out with additional
instruments in some areas.
2.2.3
Goals/distribution of resources of the Operational Programme ‘Saarland’
The content and goals of the Operational Programme ‘Saarland’ for the ERDF 2007–2013 programme
period are oriented toward the content and alignment of the National Strategic Reference Framework for the EU Structural Funds in Germany, the Lisbon Strategy and the Gothenburg Strategy. The
"Regional competitiveness and employment" goal (Article 5 of the ERDF Regulation4), which is relevant to the Saarland, was broken down into three specific goals.
2.2.3.1
Strengthening and diversifying the Saarland’s economy
The goal of "Strengthening and diversifying the Saarland's economy" is primarily focused on the creation of replacement jobs outside the coal and steel sector. This should primarily be accomplished by
supporting start-ups and comprehensive funding for medium-sized businesses and accompanying
company suppliers, and also includes financing assistance.
The competitiveness of existing companies should be strengthened to offer the companies positive
opportunities to develop, especially in view of the loss of thousands of jobs in the coal and steel industry over the last few years. The greatest challenge to the Saarland's structural policies is currently
the creation of replacement jobs outside the coal and steel industry.
In remains a goal to increase the number of companies established through the use of innovative instruments especially for this purpose. In addition to start-ups, the medium-sized companies are also
among the engines of growth and jobs. The medium-sized companies represent about three quarters
4
Regulation (EC) No 1080/2006 of the European Parliament and of the Council of 5 July 2006 on the European Regional
Development Fund and repealing Regulation (EC) No 1783/1999.
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of jobs in the Saarland, though at the same time they face considerable financing problems. For this
reason, funding medium-sized companies around the Saarland should be granted a singular role.
It should therefore be made easier for particularly small and medium-sized companies as well as
start-ups to get the capital they need through financing and investment assistance of various kinds
tailored to their needs and thereby promote their business activities.
The services sector plays an ever greater role as an employment engine in the Saarland. The tourism
industry holds special significance in intensifying structural change. The aim is to continue this path,
which has proven so successful for employment and competitiveness, over the next few years and to
help the development deficit still present in the momentum of number of overnight stays to catch up
to the national average.
2.2.3.2
Enhancing competitiveness through innovation
The goal "Enhancing competitiveness through innovation" focuses on using knowledge, research and
development, as well as innovation, as the core elements of growth and socio-economic development. The aim is to increase research competence in the Saarland and strengthen innovation at various levels. In terms of giving the Saarland as a new direction, this specific objective holds extreme
importance.
Here the Saarland places special emphasis for its future-oriented alignment on a balanced mix between old and young industries and between established technologies and new innovative areas.
This depends on the Saarland making additional project-related and technology-specific financing
opportunities available.
2.2.3.3
Making the region more appealing by improving the profile of its location and business
environment
The goal "Making the region more appealing by improving the profile of its location and business environment" focuses on improving the region through tourism and urban development.
The planned steps to improve the quality of the region have to meet the diverse needs of the various
challenges facing the Saarland. It is particularly important to overcome the specific development bottlenecks and obstacles at the diverse levels and use existing development potential for the further
improvement of the region. This focuses on four business areas:
•
Improving the competitiveness of cities, also as a trigger for regional development
•
Handling the consequences of demographic trends, especially the age-related changes in the
populace and migration
•
Battling social exclusion through better access to jobs and education
•
Renovating buildings and renewing the environment to ensure the sustainability and attractiveness of the cities
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Priority axes
The Operational Programme for the new “Regional competitiveness and employment” goal of the
ERDF will be promoted by the following three priority axes once they have been coordinated with the
government of the Saarland and with business and social partners:
•
Promoting competitiveness through growth and entrepreneurial measures to reinforce the
enterprise base,
•
Stimulating structural change through knowledge-based business, innovation and development of specific strengths,
•
Sustainable urban and regional development and resources protection
The interdisciplinary goals of "Environment" and "Equal opportunity/Non-discrimination" are pursued within all three priority axes.
2.2.4.1
Priority axis 1: Promoting competitiveness through growth and entrepreneurial measures to reinforce the enterprise base
Priority axis 1 encompasses enterprise-related funding with a planned volume of ERDF resources for
the 2007–2013 programme period of EUR 59.965 million (30.36%).
•
Boosting entrepreneurship – the Saarland Offensive for Start-ups (SOG)
To offer entrepreneurs the best possible assistance, the government of the Saarland started
the Saarland Offensive for Start-ups (SOG), a regional network including all institutions and
agencies in the Saarland which offer assistance to entrepreneurs. The SOG is to be expanded
and enhanced through new components. Projects to promote entrepreneurial initiatives and
capabilities should be carried out, whereby the supply of coaches for entrepreneurs should
be increased alongside public financing help.
•
Modern instruments for business funding
The need for financial assistance in the form of the modern financing instruments and business funding as an investment should be better met to grant companies access to the financial resources necessary to establish and expand businesses and thus for their growth. The
focus here is on support during particularly risky periods, e.g. the development of innovations, modernisation, start-up and establishment or expansion. In addition to investment
grants for companies in commercial sectors and tourism, financial aid in the form of loans,
guarantees and equity is foreseen.
•
Business services and measures to improve the business environment
In particular, start-ups and young, growth-oriented businesses need a supportive environment for their development. Specific enhancements are planned to close the gaps in supply
and in reaction to the again growing demand for space, property and business services coming from start-ups and young growth-oriented and technology-oriented businesses.
The business environment should also be strengthened through regional and interregional
collaboration between business and research partners and institutions. A funding programme is to be set up, e.g. for networks and clusters which promote the building of inter-
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company structures and which funds the resources to handle network or cluster management.
2.2.4.2
Priority axis 2: Stimulating structural change through knowledge-based business, innovation and development of specific strengths
Priority axis 2 encompasses a planned volume of ERDF resources for the 2007–2013 programme period of EUR 64 million (32.40%).
•
Knowledge-based and business-oriented R&D capacities
One major focus of priority axis 2 is the increase of R&D and innovation transfer capacities in
the research landscape of the Saarland with a concentration on the expansion of infrastructure, especially in the areas of IT, automotive and biotechnology and life sciences. Following
the principle of "strengthening strengths", this axis foresees defining topical areas with the
partners who are well-established in the innovative landscape of the Saarland.
•
Innovation clusters, competence centres and innovation transfer
It is intended to set up competence centres and innovation clusters for particularly topical issues. The aim is to take into account the "variable geometries" of innovation transfer and to
be able to offer a suitable solution for each specific industry or technology-related problem.
The promotion of technology platforms, competence centres and innovation clusters should
be just as possible here as the provision of new types of financing instruments for collaborative projects between science and business. Cooperative agreements and the transfer of
knowledge and technology should continue to be supported long-term.
•
Strengthening the entrepreneurial innovation base and competitiveness
The question of how to be able to generate innovation is initially closely linked with the problem how companies approach the topic of research and development. To change awareness
and behaviour, it is necessary to address the management level in the appropriate way. A
cornerstone of innovative companies is having leadership which values flexibility in organising one's work, co-determination and shared responsibility. Appropriate innovative measures
and optimised innovation management has to be developed for this, before a company can
become more innovative. To achieve this objective, the R&D funding landscape in the Saarland will be realigned. For this purpose, new instruments for technology-specific and topical
promotion and financing should be developed and tested.
•
Culture of innovation, qualification and access to information and communication technology
infrastructure
Since the regions also compete with each other, a targeted communication strategy is also a
key component of innovation policies. Therefore, a continuous communication process
should be set up which emphasises the innovation strategy of the Saarland over the medium
to long term. For this purpose, the Saarland intends to further develop the "Empower Germany: Through innovation we can withstand the growth crisis" initiative successfully begun
in 2004.
High-quality information and communications technology infrastructure is becoming increasingly more important for the innovativeness and the structural change of the Saarland. For
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this, the regional government intends to further expand and intensify the "Onlinerland Saarland" campaign. In the sense of an entrepreneur-oriented e-government, the Onlinedienste
Saar initiative is to be further strengthened and expanded in the Saarland.
•
"Testing Ground"
An indicative amount of EUR 2.5 million has been allotted to the experimentation of new actions (projects and concepts) under priority axis 2. The aim here is to test projects and concepts and to determine the successful projects which can be carried out on a more comprehensive basis in later years of the Operational Programme. The results of these pilot actions
will be analysed and, once the results are known, the successful actions will be further developed within the scope of the priority axes of the Operational Programme.
2.2.4.3
Priority axis 3: Sustainable urban and regional development and resources protection
Overall, this priority axis deals with enhancing the appeal of the cities and the region as a place to live
and do business by improving the "soft" factors.
Priority axis 3 encompasses a planned volume of ERDF resources for the 2007–2013 programme period of EUR 68.547 million (34.71%).
•
Sustainable urban development
The support of sustainable urban development as an important engine for necessary structural change is given considerable importance. In this category, the successful methods seen
in the 2000–2006 programme period should be further developed, taking the experience
gained into account, and incorporating the integrated approach of the URBAN II community
initiative. Therefore, it should tackle the strong concentration of business, environmental and
social problems in the urban areas applying participative, integrated and sustainable strategies.
To further strengthen the cities, a bundle of measures will be worked out and implemented
in the 2007–2013 programme period to tackle each individual urban situation. In this regard,
the large "Stadtmitte am Fluss" project should be carried out in particular with ERDF funding.
The Saarland intends to submit a corresponding application for approval by the EU Commission. Once this approval is granted, the ERDF resources provided for sustainable urban development will be primarily concentrated on the regional capital.
•
Development of tourism infrastructure by enhancing natural and cultural heritage to foster
additional potential for growth
The further development of tourism infrastructure offers the special opportunity to foster
and use the endogenous potential and natural abundance of the region through and for tourism. This makes it possible to tap into existing growth potential in tourism in the Saarland
and have a positive impact on employment. Moreover, the Saarland has always balanced the
development and promotion of its tourism with the protection of environmental policy concerns.
The aim of funding infrastructure in the Saarland is especially to strengthen the potential for
tourism inherent in each area and region. In this regard, on the one hand, it is necessary to
further develop the existing tourism strengths. On the other, improving tourism offers op-
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portunities to showcase the interregional natural and cultural heritage in the long term, especially in the rural areas.
•
Development of future sources of energy and resource protection
For reasons of environmental and climate protection, it is necessary to find sustainable energy supplies. For this purpose, new technologies need to be developed and demonstrated,
and business operations must tackle some more sophisticated technologies. This is why plans
for saving energy, for the rational usage of energy, and for the market penetration of renewable energies and the development of new processes and innovations in this area should be
funded.
2.2.5
Coherence between the Operational Programme and the JESSICA initiative
In terms of content and instrumentation, a JESSICA-based community development fund fits well into
the existing Operational Programme of the Saarland. Connections to the JESSICA initiative can be
made in all of the listed objectives of the Operational Programme.
For the objective of "strengthening and diversifying the Saarland's economy", the medium-sized
businesses in the Saarland should be supported comprehensively and the region's competitiveness
enhanced. Due to the often occurring financing problems facing medium-sized companies, financing
and investment assistance tailored to their needs should simplify the companies' access to the necessary capital. Less expensive loans, guarantees and equity investments from the CDF can make it
possible for medium-sized companies to obtain capital more easily and thereby support this objective.
Additional project-related and technology-specific financing opportunities should also be provided
towards the objective of "enhancing competitiveness through innovation", in order to augment research competence in the Saarland and to strengthen innovation on many levels. The instruments of
the CDF expand the range of existing financing possibilities and make it possible to focus on individual projects and technologies.
Funding through the CDF is only possible on the basis of integrated urban development plans, meaning that the third objective of "making the region more appealing by improving the profile of its location and business environment" is also accounted for. By reacting to the market failure in the area of
urban development policy projects, existing potential for further developing the region is exploited.
Similar to the objectives of the Operational Programme, there are also links between the priority
axes and the JESSICA initiative. In priority axis 1, the typical instruments of a CDF (loans, guarantees,
equity investments) as means of promoting business and tourism are explicitly mentioned in the
point “Modern instruments for business funding”. Furthermore, within the scope of priority axis 2,
new instruments for technology-specific and topical promotion and financing are to be developed
and tested to strengthen the entrepreneurial innovation base and competitiveness, which is in turn a
category that would fit the instruments of a CDF. Moreover, the access to information and communications technology infrastructure should be improved, which is also a possible business area for the
CDF. The contents of priority axis 3 match the objectives of the JESSICA initiative – countering the
strong concentration of economic, environmental and social problems using participative, integrated
and sustainable strategies. In addition, the special significance given to sustainable energy supplies
(energy savings, market penetration of renewable energies) is emphasised.
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All-in-all, the content and instruments of the JESSICA initiative are already built into the Operational
Programme of the Saarland for the ERDF funding in the 2007–2013 programme period, even though
the actual application of the JESSICA initiative had been left open. Implementing the Saarland Community Development Fund would therefore automatically also pursue all the objectives and all the
priority axes of the Operational Programme, which makes it more likely to achieve the objectives.
2.3 Evaluating the market for municipal and urban development projects
Cities are the heart of any economic centre. Half of the population in Germany lives in cities, which
offer the majority of jobs and thus generate the greater part of net added value. The sustainability of
urban development measures can only be ensured, however, through close cooperation between
the administration, businesses and citizens. Urban and economic development are tightly linked, and
any economic structural change has a direct impact on city planning structures as well. To face these
common challenges, there is a need for durable strategic alliances between cities (city administrations), businesses and citizens rather than hastily constructed associations during emergencies. For
this purpose, suitable forms of cooperation have to be found and set up, which requires all parties to
change and develop the way they work somewhat.
For a long while, urban development was the sole domain of the public authorities, who almost exclusively used the traditional regulatory instruments to offer services to citizens and businesses. Profound changes, both economic and societal, made it necessary to critically question this approach.
On the one hand, the demands for public expenditure growing, becoming more complex and have to
be handled more timely and tied more closely to specific projects and their implementation. On the
other, serious budgetary constraints are pushing municipalities to the limits of their planning capacities and financial possibilities and putting them on the defensive – in some cases being all but unable
to act. The public sector is now reliant on cooperation with investors and other actors at the planning
and investment level. Cooperative forms of action which transcend legally formalised planning processes have become much more important at all levels of urban development. Because of this trend
and the multitude of actors to be involved, the spectrum of potential forms of cooperation has expanded significantly; from informal instruments to contractually regulated approaches to publicprivate models. Since the start of the 80s, public-private partnerships have gained stature, especially
for larger urban renewal and urban development projects whose success in the medium to long term
depends primarily on the extent to which they can be a win-win situation for all parties. Moreover,
strategic partnerships between municipalities and businesses form the basis of concerted economic
actions, property and community associations are a new kind of city marketing, corporate citizenship
is a new understanding of community responsibility on the side of companies and citizens, and integrated housing concepts form the foundation for dealing with shrinkage in urban areas. Nonetheless,
these innovative instruments and approaches suffer from the low availability of public resources.
From this situation, it has become clear that holistic, sustainable, and future-oriented urban development cannot simply be decreed from above. The permanent nature of the problems facing urban
development (overly strained public budgets, fewer employees in the public sector, less tax income,
less economic growth, declining purchasing power, vacant retail outlets, and the demographic
change which accompanies shrinkage and suburbanisation) require professional collaboration between all parties involved. To the same extent, changes in the role of the public sector as the central
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steersman of development and any shifts in focus from issues of general welfare to individual economic interests must be critically watched.
Because of this development, the former principles of funding policies need to be examined. The inclusion of business management know-how in project conception should be welcomed because of
the greater demands on how efficiently the funding is applied. To the same extent, very few nonprofit activities should be allowed to operate at the commercial “breakeven level”. By allowing project management organisations to conduct supplementary, commercial business enterprises in future, these might help to financially support the primarily non-profit activities (cross-financing). If this
change in the methodological perspective should become part of the basic principles behind German
funding policy, it would be even easier to incorporate the financial engineering instruments propagated by the JESSICA initiative into the funding of urban development projects.
2.3.1
Current financing possibilities (public and private sector)
Investment projects in city planning are borne, financed and carried out by the public and – primarily
– by private individual investors or institutions. The condition for public investment in municipal or
state construction projects, or other projects, insofar as they are subject to the broad definition of
§ 148 of the German Federal Building Code (BauGB), is that they be financed from the public resources of the manager of that construction measure plus the relevant benefits/funding from other
public agencies. Therefore, municipalities, for example, facing the pressure of budgetary bottlenecks
which were years in the making and the present financial and economic crisis, are usually only able to
invest once the corresponding (and much greater part of the) funding from other public agencies has
been approved and made available. However, the ability of municipalities to perform their financing
obligations by putting forth their own share of the financing is equally important. When the budgets
are not balanced – which is the case for most communities and cities in the Saarland – it is mainly
necessary for them to provide their share of the financing through loans, and these are subject to
more restrictive regulatory approval. This is one of the reasons why municipal investment has clearly
and considerably dwindled. In addition to the overall economic situation, the basically negative
demographic prospects in terms of shrinking populations and the composition of the population of
the Saarland have also had an impact here. For example, the population of the Saarland is projected
to decline from 1.0 million at present to 870,000 in 20305.
Private investment is mainly interested in profitable, going concern real estate, such as housing projects, especially commercial projects, as well as shares in hotel and office projects; these occur in
those subregions or submarkets of the Saarland where the population density is stable and/or linkage effects create enough demand. Under the planning premise of “internal development before external development” and the need to focus on additional services within the scope of the preference
for reusing land, as already proscribed under § 1(6) BauGB, such projects often rely on public subsidies to reduce or cover the unprofitable part of the investment. According to the rules of the respective urban development funding based on the urban development administrative agreement for each
programme year and the corresponding implementation guidelines of the Saarland, public sector
bodies are usually the only ones approved for receiving funding. When needed, they pass such funding on to private partners in the form of urban development contracts and/or funding agreements.
5
Statistical Office of the Saarland (2004): The demographic trend in the Saarland, taken from
http://www.saarland.de/dokumente/thema_soziales/DemografischeEntwicklungSossong.pdf on 16 April 2010.
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The fact that public aid and urban development funding from the state is not received until after the
measure has been carried out and (partly) billed is particularly relevant here. Therefore, in prefinancing their own part of the funding, the municipalities are responsible for a considerable part of
the subsidies received from the funders. In cash terms, the funding to be raised is of much less value
over time than the gross amount initially provided. As in all states, the allocation and approval of
funding is primarily handled by administrative category. Consequently, this means that urban development plans are initially reviewed in terms of how they fit classic urban development funding goals
(modernisation, maintenance, enforcement and redevelopment measures, etc.) and thus it is important to present combined measures which also have a positive impact on environmental protection,
energy efficiency, CO2 reduction and business development. In any case, public funding is subsidiary,
so that urban development funding should be used to “fill in the funding gaps”. Nonetheless, urban
development funding is the most important funding source for public or private urban development
projects. However, in regard to private project managers, the general stipulations tied to the use and
the proof of disbursement of funding and the problems in their internal booking and their internal
investment accounting created by the fact that only part of the gross amount received is tax deductible means that such funding is only partly an incentive, and it represents a considerable bureaucratic
obstacle to be overcome.
In practical terms, the priority for urban development funding in the Saarland mainly directed by the
municipalities, according to § 147 BauGB (enforcement and redevelopment measures, etc.) goes to
projects which are not inherently profit generating on a revolving basis. The exception is urban development funding of the maintenance and modernisation measures for predetermined rural areas
in accordance with § 142 BauGB (redevelopment areas) and urban development areas (pursuant to
§ 171 b BauGB) based on §§ 164 a ff. BauGB and following municipal guidelines for allocating funding
to private parties in individual cases.
Interdepartmental cross-financing with analogous interdepartmental “cross-funding” using instruments which commit multiple departments are relatively rare because of the complexity of setting
up such transactions and the problem of only being able to obtain the funding if the project has not
been started yet (contradictory to funding effect).
2.3.2
Project managers’ financing needs
While public sector bodies – as shown – focus their investment mainly according to measures which
fit § 147 BauGB and only partly offer financing for measures which fit § 148 BauGB (municipal constructional measures), private partners in urban development projects have completely different financing needs. In addition to minimising costs when constructing buildings and principally when purchasing or acquiring land, their main interest in terms of costs is the borrowing costs. The tax component is equally important for private partners – each organised as a private legal entity (the various forms of partnerships and companies, with varying degrees of liability). The pertinent point for
the private actors here is to be able to deduct their implementation costs under the asset depreciation rules and, at the same time, that the responsible tax authorities allow them to deduct the input
taxes included in these costs or expenses. Particularly when a private actor incurs the unrecoverable
expenses for parts of a construction measure, such as the initial land improvement, the regulations
of the Federal Fiscal Court (the Bundesfinanzhof) – and as implemented by the local tax offices – for
the construction of roads, paths and public spaces (investment according to § 127 ff. BauGB) do not
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allow or only partially allow the deduction of input taxes. In some cases, this minimises the gross
subsidies provided by the public sector to a considerable degree. For these reasons, private investors
in urban development attempt to financially and in part organisationally (through project companies
and property companies) separate the initial project development stage, including the land acquisition, clearing and partial improvement, from the stage of building investment. It can often be seen
that project developers do not benefit from the full extent of subsidies/grants from the public sector
in terms of the subsequent cash value. Consequently, there are fewer and fewer projects where the
(lost) subsidies lower the market entry and investment barriers to the wished for degree.
In order to lower project risks and improve chances of market entry, private investors not only need
to conduct a careful analysis of (rental) market demand and the opportunities for exiting the project
(by being bought out); better conditions for the amount of capital they put up and the borrowing
costs are also crucial to their decision. Following the Basel II rating, project developers and project
investors are increasingly required to raise their capital base for the project from the original average
of 15–20% of total investment to the current average of 30–40%, and this is while facing the financial
and economic crises. This situation is currently limiting the market activities of private actors overall
and especially in weak real estate submarkets and regions. Therefore, there would be a financial advantage for private actors if it was possible to replace or augment capital through a public fund or
public grant. Subsequently, guarantees and low-interest loans, coupled with the borrowing costs
which would otherwise have to be refinanced over the borrower’s bank, are decisive.
Since real estate activity in the Saarland is limited in some areas, especially the housing, hotel and office construction submarkets, due to the financial and economic crisis and the aforementioned
demographic trends, in terms of financing, private actors are more interested in guarantees and loan
conditions to hedge rental demand than in refinancing the implementation and building construction
expenses. Therefore, private actors’ financing measures are primarily aimed at hedging rental and
user demand (e.g. hotel development) and/or optimising the energy and environmental conditions of
a property. Urban development funding aid programmes do not generally foresee this usage. In
other words: a (lost) grant to a project investor does not hedge it against the operating risks for a
property in the event of user or renter default.
Due to the primary allocation of urban development funding to the role of the “owner”, this means
potentially achievable effects end up in smoke, because the financing needs of tenants – borne indirectly by the investors – cannot be met.
The qualification process for building projects – currently being discussed under the topic of green
building/certification and the generally accepted necessity to optimise energy efficiency and reduce
CO2 emissions– usually does not allow developers to make the additional expenses for systems and
facilities to generate energy from renewable sources for the property a subject of urban development funding. The same is true for optimising telecommunication and data technology. While urban
development funding is tied to entire regions, other funding instruments are mainly limited to the
role of the owner. There is frequently no congruity between the market demand for sustainable, energy efficient real estate and a refinanceable tenant mix.
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Date
Project discussions on site
22.04.2009
St. Ingbert old cotton spinning mill/old public baths
04.05.2009
Zero emission project in Nalbach
18.05.2009
Mosaic factory in Mettlach
18.05.2009
Goldener Schwan inn in Wallerfangen
06.06.2009
Sankt Wendel location association
08.06.2009
Merzig-Saarfürst (OBG Projekt GmbH und Co. KG)
10.06.2009
10.06.2009
Energy supply/broadband/vacancy development in Losheim am See
23.06.2009
Construction concession in Völklingen
25.06.2009
Höll area/biomass power plant/city hall renovation in Illingen
09.07.2009
Breitwiese in Saarwellingen (Saarwellingen township)
09.07.2009
City hotel in Neunkirchen
28.07.2009
Inner city development in Lebach
28.07.2009
Terentiushof in Ottweiler
21.08.2009
Figure 3 – Project discussions on site
During the process of identifying projects suitable for CDF funding in the Saarland, it became clear
that there is a tight market for urban development projects, strongly aligned toward traditional subsidisation. While conducting the project discussions on site (page Figure 3), it was only possible to
identify suitable projects to a limited extent because the available information was not (yet) sufficient to evaluate the project for CDF funding. This is why KomCon was commissioned at the end of
2009 to prepare the five most promising projects for such an evaluation. The projects in the Saarland
can be broken down into two groups. On the one hand, there are projects which need less investment and which have few possibilities of generating financial returns. On the other, the development
of larger brownfield sights is under discussion, which require enormous upfront financing (demolition/removal, decontamination, restructuring) and whose chances of future returns can hardly be estimated.
2.3.3
Addressable market failure and potential role of JESSICA instruments
It was already explained in the previous chapter that, given the economically motivated position of
private actors, they seldom invest in urban development projects except for a few regional or usespecific real estate submarkets. These (still) typical submarkets in the Saarland generally refer to the
commercial segment and mainly to certain regions in the state. Private actors are also engaged in the
areas of setting up and improving telecommunication and data technology structures and optimising
the energy efficiency of buildings; however, this cannot be expected for specific neighbourhoods.
Thus, the primary investment in setting up site-development facilities, clearing land, and strengthenEIB Evaluation Study Saarland Community Development Fund – Final Report
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ing and increasing the attraction of public spaces, as undoubtedly realised by urban development
funding, decreasingly leads to investment in upgrading adjacent private property and land.
This ‘market failure’ seen here is really more of a ‘market decrease’ of private investment. Considering the demographic change and the changing consumer habits, demand parameters and financing
opportunities resulting from the financial and economic crisis , there is therefore a need to stimulate
market demand in future, not only using the lost subsidy components, whose net effect has been
shown to be considerably less than the gross amount made available, but also by providing financial
engineering instruments in the form of (low-interest) loans, guarantees and equity with the prospect
of success. Because of the financial weakness of the municipalities and their agencies, this concerns
the private urban development partners more. On the path to the desired market deregulation, this
is an inherently desirable social investment phenomenon. The JESSICA instruments, i.e. loans, guarantees and equity, thus materially supplement local market events in those places where the lost
subsidies – the second public source of intervention – might have been offered. Although the commercial and some residential6 real estate submarkets in the Saarland can be called A-list projects,
completely supported by the private market, alignment toward the ‘office, hotel and social infrastructure’ real estate submarkets, together with investment in energy and data technology optimisation for specific properties, is a decentralised focus for the use of urban development funds (B-list
projects).
Based on integrated community development concepts, there is a structural framework (‘integrated
urban development plan’) within each municipality. The targets for receiving aid in the form of
JESSICA instruments in the Saarland should thus be the municipalities and their agencies as well as
public/private companies and partners from the private market.
As earlier studies have already made clear7, the JESSICA instruments (loans, guarantees and equity)
all feature the use of revolving resources. In contrast to loans and their related guarantees, for which
repayment is periodic, the repayment of equity capital investment is usually done once from the
sales proceeds upon exiting the project. This makes is possible to cover the much higher costs of
capital. Equity capital investments are the only instrument where the investor maintains far-reaching
influence in the project8, the capital invested in the project has a maximum leverage effect, and the
investor participates in equal parts in both the project risks and the chances of profit. Additionally, it
is only through the use of equity capital investment that the risk of so called “crowding out effects”
can be limited, which makes it easier to review a project’s eligibility for aid. Moreover, there is normally not enough equity capital available for development projects, which regularly results in market
failure, i.e. those projects are not carried out.
6
Cf. KomCon’s Report on preparing the five application-ready pilot projects for the Saarland Community Development
Fund dated 3 March 2010.
7
Cf. BMVBS/BBR (eds.) (2009): Urban Development Funds in Europe. Ideas for Implementing the JESSICA Initiative,
BBSR-Online-Publikation 03/2009.
When equity capital is granted as a dormant partner’s interest, this only applies to a limited extent.
8
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LEGAL CONDITIONS FOR IMPLEMENTING THE SAARLAND COMMUNITY DEVELOPMENT FUND
The general legal framework regulating the investment and financing activities of a CDF are described
herein. Any specifics tied to particular pilot projects – based on information available today – are laid
out again in Chapter 5.3. Due to the current status, this does not represent a conclusive legal analysis. Therefore, the following legal framework must be considered in the conception and further implementation of the CDF.
A look at the legal framework first considers the rules specific to Structural Funds. Then there is the
general legal framework set up by European and national provisions, which established the borders
within which a UDF can be set up and operate.
3.1 Structural Fund Ordinances and COCOF Notes
The general regulations regarding UDFs, which, like the planned CDF, are based on the JESSICA initiative, can be found in the EU Structural Fund Ordinances (Regulation (EC) No 1080/2006, 1083/2006
and revisions to such). Their programme period currently runs from 2007 to 2013. The relevant legal
provisions therein form the European legal framework for JESSICA, though only the core provisions
will be repeated here. The publications of the Coordination Committee of the Funds (COCOF) and any
subsequent revisions to the relevant regulations must also be taken into account.
3.1.1
Reg. (EC) No 1083/2006 (General provisions on the Structural Fund and the Cohesion Fund)
Regulation (EC) No 1083/2006 contains rules, regulations and general principles for the ERDF, the
European Social Fund (ESF) and the Cohesion Fund. The goal of the ordinance is to strengthen economic and social cohesion to promote harmonious, well balanced, and sustainable community development during the 2007–2013 programme period.
The ordinance sets up a framework within which cohesion policies can be carried out, and sets individual goals for the diverse funds to achieve. Moreover, the ordinance lays down criteria for which
Member States and regions are eligible for funding, sets out how much financing is available and describes the criteria for its allocation.
Articles 36, 44 and 78 of the ordinance are especially relevant here. In terms of how to structure the
fund, we look to Article 44, which lists the approved financial engineering instruments, opens the
fund to holding models and stipulates how to set these up, particularly how to apply public procurement law. Article 78 regulates the declaration of expenditure and state aid legal classification of fund
trading.
Another crucial regulation for contributing resources is the N+2 Rule pursuant to Article 93(1) of
Regulation (EC) No 1083/2006. Here it is set down that the EU funding committed to an Operational
Programme must be automatically decommitted on 31 December of the second year after the commitment was made as long as the resources have not been called upon by advance or interim payment or an approved request for payment has been submitted. The financing tranche stipulated in
the Operational Programme for that year commits the capital in the EU budget and has to be called
upon by 31 December of year n+2. In terms of how the cost reimbursement principle applies, this
means that the expenses in fact have to be paid before they are reimbursed. Since placing the reEIB Evaluation Study Saarland Community Development Fund – Final Report
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sources into a JESSICA fund counts as spending it for the specified purpose, the N+2 Rule no longer
applies after the point at which the money is paid into the fund. In regard to the CDF to be set up in
the Saarland, the decisive point is that the fund must be implemented by 31 December 2010. This
would prevent the loss of the resources. Nonetheless, the money must then after be used for the
specified purposes and the fund has to spend it by 2015; otherwise, it will be in breach of Article 1(7)
of Regulation (EC) No 1083/2006. Any EU monies not spent by the end of the programme period
have to be repaid to the EU. This must be borne in mind as the project selection is further structured
and the during the actual investment activities of the fund.
3.1.2
Regulation (EC) No 1080/2006 (ERDF Regulation)
Articles 4 and 5 of Regulation (EC) No 1080/2006 initially lay out the diverse areas approved for investment depending on whether the goal of the Operational Programme is “convergence” or “regional competitiveness and employment”. The resulting guidelines for the existing Operational Programmes thus mainly cover the use of ERDF money within the scope of JESSICA funds. The relevant
goal for the Saarland is “regional competitiveness and employment”, according to Article 5 of this
same regulation.
Article 7 of this regulation specifies the types of expenses and excepts certain types of ERDF funding,
thereby limiting the possibilities laid out in Articles 4 and 5.
Article 8 of this regulation basically expands the areas of application listed in Articles 4 and 5 as they
apply to the “sustainable urban development” goal once – as has happened in the Saarland – the
Operational Programme has been opened accordingly.
3.1.3
Regulation (EC) No 1828/2006 (Implementation Regulation)
This ordinance contains the main regulations for the financial implementation of the CDF models. Of
particular relevance are the regulations in Section 8 – Financial measures (Articles 43, 44, 45 and 46),
which show how to apply Regulation (EC) No 1083/2006 to a fund. It includes detailed guidelines on
setting up and using financing elements (administrative costs, business plans, appropriate of earnings). Moreover, it lays out special requirements for holding funds and UDFs.
In basically expounds on the so called Rule 8 guidelines from the abolished Regulation (EC)
No 448/2004 for the programme period coming to an end. In principle, these are the already known
guidelines for setting up funds. Regulations were added for holding funds and UDFs, including, but
not limited to, the following conditions of use:
•
Revolving usage of funding which also extends beyond the end of the programme period to
the advantage of urban development projects or to fund SMEs (Article 78(7) of Regulation
(EC) No 1083/2006). It recommends that the funding be used in pursuit of the Operational
Programme’s goal (cf. COCOF 08/0002/03-EN, pg. 4).
•
Setting up the fund as an independent legal entity ... or a separate block of finance within a
financial institution (Article 43(3) of Regulation 1828/2006, modified by Article 43(2) of Regulation 846/2009).
•
The UDF, not the company, is the beneficiary. This means that the resources can be granted
to the fund without proof of already having been spent. Payment to the UDF counts as an
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expense and does not have to be accounted for until the end of the programme period (no
application of the expense reimbursement principle at the fund level). It is possible to invest
the ERDF resources profitably in the interim. This has the advantage that interest can even
be generated in the fund, increasing the capital.
3.1.4
COCOF Notes
According to Article 103 of Regulation (EC) No 1083/2006, the Commission is supported by the
COCOF as the coordinating committee for the fund in terms of applying the regulation guidelines.
The committee develops tips for practical application, for public administrators, beneficiaries, potential beneficiaries and other agencies involved with the supervision, control and implementation of
cohesion policies. It supports these groups in the correct interpretation and application of community legislation in the area of cohesion policy. The COCOF Notes do not have any legally binding effect
on these guidelines, neither for the Commission nor the other users and affected parties. Thus, neither the CDF nor the Saarland, as the recipient of ERDF resources, is directly obligated. The COCOF
Notes explicitly do not pre-empt interpretation by the ECJ and the Court of First Instance nor the ongoing decision-making practices of the Commission. Even though the Commission is not bound to the
interpretations laid out in the COCOF Notes, it shall not deviate from the published perspective without substantive reason.
The interpretations especially relevant to the application of JESSICA are contained in the two Guidance Notes on Financial Engineering from 2007 and 2008 and the Guidance Note on the Eligibility of
Energy Efficiency Measures and Renewable Energies for Funding by the ERDF and the Cohesion Fund
in the Construction Sector (including housing).
3.2 Operational Programme
The Operational Programme ‘Saarland’ (ERDF 2007-2013) pursues the goal of “regional competitiveness and employment” according to Article 5 of Regulation (EC) No 1083/2006. Pursuant to Article 37
of the same regulation, it contains the strategic framework for the use of funding. In particular, it lays
out an analysis of the current economic situation in the relevant regions, a list of funding needs and
the funding strategy, a breakdown by priority axis, the individual funding measures, and a financing
plan. The Operational Programme already includes reference to the JESSICA initiative and reaffirms
the intention to use this to support sustainable urban development (see Chapter 0).
3.3 Budget Law of the Saarland
The budget law of the Saarland is only relevant insofar as it does not contradict European law (European law holds precedence). The restrictions included in the budget law on the acquisition of shares
in companies organised under private law are especially important. For example, § 65 of the Budget
Provisions of the Saarland (hereinafter referred to as LHO) lays out the conditions under which the
state may invest in a company organised under private law. Since the planned CDF will be set up as a
venture capital fund with its own legal entity, these guidelines play a central role in both the establishment and the activities of the fund. The acquisition of land is also subject to restrictions found in
§ 64 LHO. For example, like the acquisition or sale of interests in private companies, the consent of
the Minister for Finance is needed for the acquisition or sale of land and property.
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The issuance of lending commitments and the assumption of guarantees of all kinds by the Saarland
also requires the consent of the Minister for Finance according to § 39(2) LHO. If, for example, a CDF
needs to borrow additional capital, the Saarland may only give the lender guarantees in line with
§ 39(2) LHO.
Moreover, any restrictions in the municipal budget laws must also be considered. For example, a
municipality subject to budgetary supervision may not participate in setting up a UDF, since any
revenues first have to be used to pay off debt. Revenues would have to be used to pay off debt instead of being reinvested in urban development projects or SMEs, as investment in JESSICA funds
stipulates.
3.4 Capital Market and Corporate Law
Aside from issues of European and general public law, there are numerous implementation issues
which fall under the purview of general civil law and especially capital market, corporate and tax law.
For direction on questions about implementing a CDF as a venture capital fund under capital market
law – particularly the German Banking Act (KWG) – and corporate law, we refer to the diverse governance models in Chapter 4.
Note also that the issues covered in this category are primarily in reaction to individual decisions of
commercial implementation. This is why these issues are particularly relevant in terms of involving
institutional investors. As present, this is not the case from the perspective of the CDF. Nonetheless,
attention should already be drawn to the relevant legal factors now, so that the fund can be set up
with sufficient flexibility where possible. Some of the factors are named below:
•
Compliance of mandatory investment principles with the regulatory conditions for certain investors (insurers, pension plans, utilities).
•
Implementation of individual profit participation clauses and preferential rights for individual
investors (investors operating under market economy investment principles in accordance
with Article 43(7) of Regulation (EC) 1828/2006).
•
Determining the regulations on liability for the fund’s activities externally and internally and
any agreements on indemnification from liability.
•
Structuring “loss protection clauses” for investment in non-profit projects.
•
Creating exit clauses for fund investors, should they wish to exit before the programme period is over.
•
Compliance with tax guidelines, especially income, value added and land transfer taxes.
•
Compliance of co-investments in the target project by private investors.
•
Determining the exit structures of the various possible wrap-up scenarios (expiration of that
programme period, wrap-up of funded projects, etc.).
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3.5 Public Procurement Law
There are public procurement legal issues at both the fund and project level. At the fund level, private investment in the planned fund is subject to mandatory tendering. This investment at the fund
level might have implications for any participation of the investor at the project level. Fundamentally,
however, private investors’ interests in a JESSICA fund do not conflict with their investment as lender
to a bidder or bidding consortium. If, however, the participating investor acts as a bidder itself or
member of a bidding consortium, e.g. by investing as an institutional equity investor, then it must be
ensured that this double participation does not give it a competitive advantage over bidders with no
ties to the fund. In general, this should not be a problem since the investment in the fund is structurally set up differently than participation in a concrete, individual project and because the fund itself
does not award the contract. The latter is also the reason why the regulation for project participants
laid out in § 4(5) VgV (the German Ordinance on the Award of Public Contracts) is not applicable to
the constellation presented. Should private investors with interests in a JESSICA fund later participate
in the tender procedure for a project being funded, they have not “advised or otherwise supported
the awarding body before the start of the award procedure”.
If the public investors in the fund intend to commission a private person to manage the fund, this is
subject to the conditions for awarding public contracts. However, this is only so if the fund can be
qualified as a public awarding authority. The concrete setup is the crucial point here. If there is no legal autonomy and if the fund is located at the SIKB, for instance (Model 2, Chapter 4.2), its ability to
award contracts relies on whether it is classified as a public awarding authority. If it is legally
autonomous and partly held by private partners, there might not be enough governmental control to
qualify as a public institution according to § 98 No 2 GWB (Restriction of Competition Act). When the
fund’s investors and management are both public bodies, however, this condition is fulfilled.
At the project level, project managers might be obligated to conduct a tender procedure to award
concrete contracts for the implementation of their project. This is not so for the selection of projects
to be funded. The actual choice of projects is not influenced by public procurement law. The acceptance of projects into the funding programme has to be transparent and non-discriminatory, but is
not tied to public contracts. Rather, public procurement law first takes effect in the relationship between the project managers and the companies bidding on the concrete project undertakings.
3.6 European Law
European law is particularly relevant when looking at the question of state aid. The state aid guidelines listed under Article 107ff. TFEU (Treaty on the Functioning of the European Union) have to be
followed whenever state financing measures are applied to companies. European state aid legislation
is part of the European rules on competition and, as such, is aimed to counter any attempts by
Member States to restrict competition. In principle, European Community aid – which includes ERDF
resources – is not subject to Article 107ff. TFEU. Though monies deposited into and granted by the
CDF are also partly ERDF funding, the beneficiaries are not entirely excluded from the jurisdiction of
European state aid law. Regardless of the legal form of the fund and the origin of the deposits, Article 9(5) of Regulation (EC) No 1083/2006 stipulates that operations financed by the Structural Fund
shall comply with the provisions of the EU treaty. The term operations denotes both the contribution
to the CDF and the subsequent provision of equity investments, loans and guarantees for companies
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or urban development projects, meaning that European state aid law is applicable at both the fund
and the project level. The Operational Programme ‘Saarland’ (ERDF 2007-2013) – like all Operational
Programmes – includes an indication on page 164 that the company-related funding must comply
with EU state aid legislation.
For a measure to be considered ‘aid’, the state has to grant preferential treatment in the broadest
sense (“no matter what kind”). It can be said that the state is involved in the operations of the fund
because the fund is co-financed using public resources in all of the proposed models. Because the
state aid should not restrict competition, the legal form of the beneficiary company and the shares of
ownership it holds are not relevant; merely whether it participates in a competition. This is to be assumed in case of doubt – unless it is for general infrastructure measures (streets, bridges etc.). Another condition of state aid is that there can be no appropriate payment for the preferential treatment granted. Given the lack of experience and relevant ECJ decisions in evaluating appropriateness,
one should turn to the general criteria and instruments of state aid, especially the private investor
test (PIT). The PIT examines whether private investors of comparable size and the public sector administrative body in a comparable location would have acted as the public entity did. If in this case
the state behaves as an investor in a market economy, this condition rules out the existence of aid.
This also raises the question, when examining the eligibility of fund activities for state aid, whether a
comparable private investor would have invested under the same conditions. Based on the fundamental idea behind the JESSICA initiative that those projects should be funded which purely private
investors would avoid due to their questionable profitability, the PIT would normally return a negative result.
Looking at the proposed guarantee fund, a fund which operates with guarantees, criteria for evaluating the eligibility for state aid can be found in the Commission Notice on … State aid in the form of
guarantees (Official Journal of the European Union No C 155 dated 20 June 2008, pg. 10). The core
elements here include whether the price paid for a guarantee is “market-oriented” and the basic restriction that the guarantee does not cover more than 80% of the outstanding loan or other financial
obligation. Applied to the planned guarantee fund, this means that this fund model is not very attractiveness, because the JESSICA-funded projects normally face increased risk of default, which entails a
high fee for the guarantee.
Preferential treatment which may qualify as aid because of its type, but which falls below the so
called De-Minimum Regulation (Regulation (EC) No 1998/2006) due to its minor extent and thus little
relevance to competition is not covered by Article 107(1) TFEU. The relevant size is a total volume of
EUR 200,000 for aid in the form of grants or indirect subsidies. In terms of the CDF, note that it is not
meant to issue grants, but rather operate using loans or equity and venture capital investments. For
forms of grant other than subsidies, a “gross subsidy equivalent” shall be calculated to clarify
whether they qualify for the De-Minimis Regulation. This is only allowed, however, it if can be calculated “transparently” in advance. According to Article 1(4) of Regulation (EC) No 1998/2006, the calculation for loans shall use customary market interest rates. Equity and venture capital shall only be
considered transparent according to the guidelines if the total amount remains below the de-minimis
threshold of EUR 200,000. Against this backdrop, in concrete terms the De-Minimis Regulation can be
ruled out for everything but loans.
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Even outside the De-Minimis limits and the special rule for SMEs, there is still the possibility of granting funding which complies with state aid law. Pursuant to the exemption guidelines in Article 107(2)
TFEU, aid can be compatible with the domestic market or, according to Article 107(3) TFEU, the
Commission can declare it to be compatible with the domestic market. The crucial point here is always that the measure does not distort competition in any way.
If, for purposes of security, the conformity of preferential treatment with state aid law needs to be
established in advance, it is possible to follow a notification procedure, whereby the Commission is
notified in a timely manner, i.e. before the measure is carried out. Once the Commission has all the
information needed to examine the measure, it generally decides on the legality of the preferential
treatment within two months9. This presents a problem insofar as all economic parameters have to
be determined before the investment is carried out, so that the these can be evaluated by the Commission.
9
Cf. Sollgruber, Grundzüge des europäischen Beihilferechts 2007-2013, Vienna 2007, pg. 26.
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4
43
POTENTIAL GOVERNANCE MODELS FOR THE SAARLAND COMMUNITY DEVELOPMENT FUND
In this chapter the diverse potential governance structures for the Saarland Community Development Fund – as they were developed in the consulting process – are presented and evaluated from
the financial perspective. The models are both described and illustrated, with each fund and its allocation among the individual actors highlighted in grey.
4.1 Model 1: In-house Loan Fund in the MEET and MES of the Saarland
4.1.1
Financial Analysis
The independent legal experts behind this study and members of the Saarland working groups conceived the following “in-house model” during a number of meetings as a solution to the governance
problems of the Saarland Community Development Fund (see Figure 4).
State of Saarland
MEET
MESA
Other
ministries
Administrative department
(fund management)
CoERDF
finance
Contri- (funds man.
bution
(state)
agency)
Loan
(CEB)
1. Community Development
Fund as inhouse solution
Loan
Loan
Loan
External Consultants
SIKB (where appropriate
with advisory board)
- project review
- lending decision
- loan controlling
- capital adequacy
Project 1
Project 2
Project…
Figure 4 – CDF as “in-house” loan fund
This CDF is set up in the federal state ministry as an administrative department without its own legal
entity. The fund should extend loans to municipalities and/or companies. The necessary banking license of the SIKB should be “used” for this purpose.
The financial institute sees itself as merely a disbursing bank undertaking no credit risk, which the
CDF alone should bear. The refinancing should occur in three equal parts from ERDF resources, state
resources and a CEB loan to the fund.
Use of the banking license in this model must comply with all regulations of the German Banking Act.
In concrete terms, this means the credit and financial aspects of the project must be evaluated
(bringing in outside experts if necessary), the lending decisions must be made by the holder of the
banking license, and the financial institute is responsible for both monitoring the loan and bearing
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the risk of credit default. Furthermore, depending on the project borrower, the bank must also back
the risk with capital. Therefore, how well this model works financially depends in the end on how
well the holder of the banking license makes lending decisions. If the individual project types are
found to not be creditworthy and there is a considerable risk of default, they would not pass the
bank’s requirements and would not be financed.
Against this backdrop, it does not seem possible that the ministerial fund management makes lending decisions (as has been foreseen in the discussion so far). If the CDF is refinancing with credit, the
implicit acceptance of a lower probability of repayment also seems debatable. The case of a ministerial decision maker without banking license and banking know-how (KWG) overriding a lending decision (for a project actor eligible for funding but not creditworthy) also seems problematic (“the fund
manager makes the funding decision”). Moreover, the capital requirement of a bank and thus its financial collateral appears to be at risk. The alternative of lending exclusively to municipalities seems
quite ineffective given the communities’ debt situation, not just in the Saarland. Extending purely
subordinated loans does not fit the foreseen project financing of real estate and land development.
Furthermore, the JESSICA regulations stipulate that the UDF should be established either as a new
company with its own legal personality or as a fixed part of a financial institute, where it would be
recognised as its own accounting entity. The fund property held and managed by the ministry (inhouse model) is currently not foreseen and might also contradict the principle of “independent fund
management”.
4.1.2
Legal Analysis
In this model, requests for JESSICA funding and loans are directed to the “fund management”, which
is merely an administrative department at the state ministry (in-house model). The fund management also makes the lending decisions. The SIKB simply functions as a paying agent and signs the
loan contract with the borrower in the name of and on behalf of the state (in reference to the fund
set up there as a separate asset). The lender is the state.
Extending cash loans is a lending transaction according to § 1(1.2.2) KWG, if the lending is commercial (i.e. long-term and with the aim of generating profit) or to an extent required by a commercial
enterprise; the latter is regularly the case when there are 100 loans or more, or when there are 21
loans or more with a total volume of more than EUR 500,000. Once this threshold has been reached,
regulations prohibit the state in said paying agent model without a banking license from extending
loans (directly) unless they are purely subordinated loans (loss participation clause/qualified subordination agreement), since they are then not viewed as loans according to the regulation.
Implementing the in-house model is problematic from the perspective of the Structural Fund regulations. According to Article 43(2) of Regulation (EC) No 1828/2006, a UDF shall either be its own legal
entity (similar to the venture capital model in Chapter 4.5) or a fixed block of finance within a financial institution – such as the SIKB.10
10
Urban development funds are financial engineering instruments (Article 3(2c) of Regulation (EC) No 1080/2006, Article 44.1 of Regulation (EC) No 1083/2006) which must be independent legal entities … or a separate block of financing within a financial institution (Article 43(3) of Regulation (EC) No 1828/2006, amended by Regulation (EC) No
846/2009). References in this study to Article 43(3) of Regulation (EC) No 1828/2006 are understood to be references
to this norm in the revised version.
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This is where an in-house model, which includes a separate asset of the state as a separate accounting entity in the form of a settlement account through which the SIKB merely directs money in the
name of and on behalf of the state (paying agent model), fails. In this case, the separate asset of the
state would not be an independent legal entity but a block of financing in the state. However, the latter is only possible “within a financial institution” according to the Structural Funds regulations. In
addition, there would be the problems of financial regulation.
4.2 Model 2: Loan fund in the SIKB
4.2.1
Financial Analysis
The fund is established without its own legal personality as part of the SIKB as a separate accounting
entity there. In this case the bank is the fund owner and manager and obtains the appropriate allocation of ERDF and state funding. The SIKB would set this up as a separate asset within the bank. The
fund would extend loans to municipalities and/or companies directly through the SIKB using its own
banking license. The bank bears all credit risks for the fund assets. The refinancing should occur in
three equal parts from ERDF resources, state resources and a CEB loan (see Figure 5). For this purpose, the SIKB would be a borrower from the CEB and a funding recipient of the state and the ERDF
(within the scope of the planned refinancing capital).
Although this model effectively solves the JESSICA regulatory problem, the financial problem is still
clearly there. How well this model works still depends in turn on how well the SIKB makes lending
decisions.
State of Saarland
MEET
MESA
Other
ministries
Contribution
with advisory board):
- project review
- lending decision
- loan controlling
- capital adequacy
ERDF
(funds man.
Authority)
Cofinance
(state)
Loan
(CEB)
Fund as separate SIKB asset
Loan
Project 1
Loan
Project 2
Loan
Project…
Figure 5 – CDF as separate SIKB asset
Given the bank’s basic risk-averse attitude, it seems possible that only a few or no projects would be
deemed creditworthy from the perspective of the SIKB. Due to the necessary acceptance of credit
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risks, the capital requirement for the credit business and the administrative and refinancing costs (of
the CEB loan), the financial problems get even worse. These can only be lessened to a limited degree
if the public allocations form a liability buffer for the SIKB as “first loss” capital, which would have to
be clearly set down in the relevant financing agreements.
An analysis of the governance structure from the view of European law would be required to determine whether it would be necessary to conduct a tender procedure to commission the SIKB.
4.2.2
Legal Analysis
In contrast to the paying agent model above, here lending requests are directed to the SIKB. The
bank signs lending agreements in its own name and on its own behalf and thus sets up its own credit
relationship, refinanced with ERDF funding.
As long as the outsourcing agreement complies with the outsourcing regulations of the KWG, the
(outsourced) fund management may prepare a noncommittal project evaluation and lending decision
(credit processing/approval) for the SIKB; this is also true for the funding approval (notice of granting), whose submission would also be a requirement for credit approval.
Such a modified in-house solution, where the SIKB handles and is responsible for the lending, is also
justified under the Structural Funds regulations. In this case, the UDF would be set up as a separate
block of financing (Model: lending through the SIKB), fulfilling the requirements of Article 43(3) of
Regulation (EC) No 1828/2006. If the SIKB handles the lending, the financial regulatory problems do
not arise. The in-house element would still be reflected in the fact that – according to the outsourcing regulations – the lending, including the decisions regarding funding requests, would still be prepared by a fund management agency set up in the state.
4.3 Model 3: Saarland Holding Fund in the EIB
4.3.1
Financial Analysis
As an alternative to the in-house model, the EIB proposed that a Saarland EIB holding fund be established, into which the planned refinancing would flow. Consequently, the holding fund would give resources to the UDFs in the Saarland, which could then be used to extend loans to urban development
projects. In this model, it is also imaginable that the EIB holding fund provides equity to the individual
UDFs in the Saarland (see Figure 6).
This governance alternative does not solve the final problem of giving cash and loans to urban development projects. In the end, a UDF financed by the holding fund would still have to solve the same
problems presented in structural alternatives 1 and 2.
Moreover, another “administrative level” would be introduced with its own costs. Covering the administrative costs is already the greatest challenge for the fund manager (aside from the default
risks). The likelihood that there will be the need for several UDFs in the Saarland seems low as well,
since the search for projects, conducted by the working group and experts for a UDF, already proved
to be very difficult. Therefore, there is not enough business for a holding fund in the Saarland. Looking at the administrative costs of the EIB, the complete fund volume might be too small for a holding
fund anyway.
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State of Saarland
MEET
MESA
Other
ministries
Allocation
ERDF
(funds man.
authority)
EIB:
- technical support
- Holding Fund management
Contribution
- project review
- lending decision
- loan controlling
- capital adequacy
Cofinance
(state)
Loan
(CEB)
Fund as EIB-Holding Fund
Equity
UDF 1
Loans
Equity
Equity
UDF 2
Loans
UDF …
Loans
Project 1
Project 1
Project 1
Project 2
Project 2
Project 2
Project …
Project …
Project …
Figure 6 – CDF as EIB holding fund
4.3.2
Legal Analysis
This structure adds an additional level above the UDF, where the holding fund is to be found. The
holding fund gives the funding to one or several UDFs.
From the regulatory perspective, the same statements are true as which apply to setting up a UDF as
its own legal entity. The only difference, which is irrelevant in terms of regulations, is that a holding
fund stands above the UDF. This does not change the fact that the UDF, which will do the individual
lending in the end, does not have a banking license. A banking license at the holding level would not
help the UDF, since the holding fund gives the resources to the UDF, so that the lending regulations
would still apply to the UDF.
4.4 Model 4: Guarantee Fund for Lending by the SIKB
4.4.1
Financial Analysis
Against this backdrop, another alternative can be imagined: To solve the lending problems in Model
2, it might be feasible that the SIKB – as foreseen in the KWG – examines, grants, secures (with its
own resources) and monitors all loans itself. The CDF would be established as a pure guarantee fund
to compensate for the high default risks. In order to avoid the problems in regard to the JESSICA
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regulations, this would not be set up within the ministries, but as its own legal entity. In this case, the
fund would solely carry out the role of a guarantor for the SIKB (as social property of the state),
thereby reducing its risks practically to zero (see Figure 7).
According to state aid law, however, it appears necessary for a pure guarantee fund to calculate its
guarantee fees to cover the costs of the high default risks (in accordance with the likelihood of default and the refinancing costs).
From the financial perspective, it can be assumed that it would no longer be possible for lending to
urban development projects to be profitable. In addition to the interest on credits, the project actors
would also have to bear the cost-effective guarantee fees. It seems unrealistic that the SIKB will
bankroll the costs. This significantly increases the burden on the individual urban development projects, which again makes it doubtful that the projects are financially viable.
State of Saarland
MEET
MESA
Other
ministries
Allocation
CoLoan
ERDF
finance
(funds man.
guaran- authority)
(state)
(CEB)
- provision of capital
tee
- project review
fee
- lending decision
Fund as guarantee fund
- loan controlling
- capital adequacy
- allocation of (own) capital
Project 1
Loan
Project 2
Loan
Project…
Loan
Figure 7 – CDF as guarantee fund
4.4.2
Legal Analysis
Under the guarantee fund model, the SIKB handles the lending in its own name and on its own behalf. The fund issues a guarantee to hedge the debt service.
Granting guarantees of all kinds to others is banking business according to § 1(1.2.8) KWG, if it is
commercial or to an extent required by a commercial enterprise. (The threshold is as shown in 4.2.1:
more than 100 individual guarantee credits or more than 21 individual guarantee credits with a total
volume of more than EUR 500,000). No banking license is necessary if provisions have already been
taken to fulfil the guarantees, such as backing the guarantee with cash. The fund could deposit the
cash collateral in an escrow account, for example.
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49
If the guarantee fund was established as a separate asset of the Saarland, like the in-house model, it
would not comply with Article 43(3) of Regulation (EC) No 1828/2006. This could be avoided by setting it up as an independent legal entity, as conceived.
4.5 Model 5: Venture Capital Fund with its own Legal Personality (start-up)
4.5.1
Financial Analysis
This leaves the final alternative of establishing the fund like a venture capital fund as a legal entity. As
long as this public company (e.g. a limited liability company) has state funding and a loan from the
CEB, it can receive allocations. Consequently, it can invest equity into individual projects (see Figure
8).
State of Saarland
MEET
Allocation
ERDF
(funds man.
authority)
Other
ministries
MESA
Capital
contrib.
Shares
Cofinance
(state)
Tender procedure/
Agency agreement
Loan
(CEB)
Fund as venture capital fund
(start-up)
Equity
Project 1
Equity
Fund management:
- project review
- financing decision
- project controlling
Equity
Project 2
Project …
Figure 8 – CDF as venture capital fund (start-up)
This would comply with the JESSICA regulations. Moreover, the KWG would not apply. The risk would
be borne completely by the newly created project company or partnership of convenience. No paying agent with a banking license would be needed; the majority (if not all) of the company shares
would be held by the Saarland. A tender procedure could be used to engage an independent agency
to manage the fund.
Instead of an expensive loan, the projects would obtain interest-free venture capital. This might enable them to take on a commercial loan for financing, thereby spreading the default risks. The returns come from the project cash flows, which would be paid according to the share of equity finance
in the fund.
The future CDF would be a classic private equity fund in this case. This is not currently subject to any
comprehensive capital market regulations. The AIFM (Alternative Investment Fund Manager) guidelines planned at the European level will not impact the fund, since its asset portfolio has not already
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surpassed the EUR 100 million threshold. If the fund chose not to refinance using loans, it could even
grow to a volume of EUR 500 million without having to comply with additional regulations. This
would offer the opportunity to set up the business activities of the fund in this model strongly in line
with the individual situation of the Saarland.
4.5.2
Legal Analysis
In contrast to the in-house model, the UDF is set up as an independent legal entity for equity investment. Two legal forms seem relevant, a company organised in a corporate form – especially the
GmbH or Limited Liability Company because there are few formal requirements – and a partnership –
particularly the limited partnership due to its limited liability and flexible setup under company law.
Before reaching a final choice, the taxation aspect must be considered if private investors join in. The
SME investment fund set up under the JEREMIE initiative offers some orientation in this regard.
There are currently no regulatory problems in investing ERDF resources via an equity (investment)
fund in the setup described above, since it either does not, or can be designed so that it does not fall
under the definitions of the KWG, or is exempt from them. Nonetheless, an eye should be kept on
the current development of the AIFM guidelines if there are plans to gather or invest private investor
capital via an equity fund. The draft guidelines particularly cover private equity funds and include
stipulations for the supervisory duties of the fund manager. However, this only refers to the administrators of those funds which can be considered undertakings for collective investment, meaning that
a fund with the Saarland as the sole partner would not be included. As long as Germany makes use of
the optional threshold exemption rule, funds with volumes up to EUR 100 million (and those without
leverage or right of return before 5 years up to EUR 500 million) are also not included. The draft
guidelines were and are being strongly criticised and are still in the legislative procedure. Insofar as
the (implementation of the) AIFM guidelines would have a negative impact on the fund, this might
(at the current stage) be avoided though a direct investment or co-investment by the private investors at the project level.
4.6 Model 6: Venture Capital Fund with its own Legal Personality as a Separate
Asset of the State
4.6.1
Financial Analysis
As in Model 5, the CDF is established as a venture capital fund. Assuming the other premises regarding business activities remain the same, the Saarland acts here as regional authority. It would be considered its own legal entity under public law (like a “credit institution” in the first models).
The fund in the strictest sense is also set up as a separate block of finance (separate asset), which as
an administrative department within the state government is subject to special implementation provisions and, in particular, separate accounting (separate accounting entity at the LHK (state exchequer)). This administrative department in the ministry manages all investments, with the support of
external experts if necessary (see Figure 9).
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State of Saarland
MEET
MESA
Other
ministries
Administrative department:
Fund management
- project review
- financing decision
- project controlling
External consultant
Allocation
ERDF
(funds man.
authority)
Cofinance
(state)
51
Loan
(CEB)
Fund as venture capital fund
(separate state asset)
Equity
Equity
Project 1
Equity
Project 2
Project …
Figure 9 – CDF as venture capital fund (separate state asset)
It is unclear whether this would actually fulfil the requirements of Article 43(2) of Regulation (EC)
1828/2006. If European law was to say yes, this would be a more efficient variant than Model 5 (venture capital start-up) from the financial perspective. It might be faster, simpler and cheaper to establish the fund. In doubt, this would be reflected in the form of lower management costs.
4.6.2
Legal Analysis
In evaluating the merits of this model, reference is first made to the remarks on Model 5 regarding
the financial framework. The extent to which the setup fulfils the requirements of Article 43(2) of
Regulation (EC) No 1828/2006 depends on the legal nature of the separate asset. It is not enough at
this juncture that the Saarland itself, as a “legal person under public law”, represents an “independent legal entity”. This is already the result of the Structural Funds regulations being based on the idea
that the independent legal entity as a special purpose vehicle only has the resources for funding one
specific project. Other legal entities with access to funding for other purposes have to put this money
into a separate block of finance with separate accounting to avoid mixing them up with other resources. As mentioned, the Structural Funds regulations only foresee this possibility for financial institutions. Moreover, they stipulate that the administrative authorities select the financial engineering instruments and sign a financing agreement between them11. The administrative authority is a
national, regional or local agency or public or private body appointed by the Member State to manage the Operational Programme12. In the present case, the Saarland is the administrative authority
and must perforce be separate from the financial engineering instrument. Accordingly, it depends on
the legal form of the separate asset. Note that separate assets at the federal level do not normally
have the legal capacity of the federal government (e.g. the German Rail Authority, Sonderfonds Finanzmarktstabilisierung, ERP-Sonderfonds). The peculiar aspect of this asset form is that, while it is a
part of federal property, it is not subject to the general budgetary rules. Insofar as the separate asset
of the Saarland also holds this status, the requirements of Article 43(2) of Regulation (EC) No
1828/2006 are not fulfilled, since the legal entity is not independent. If this separate asset can be
11 Article 43(2) and (3) of Regulation (EC) No 1828/2006 in the form revised by Regulation (EC) No 846/2009.
12 Article 59(1a) of Regulation (EC) No 1083/2006.
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given its own legal capacity within the scope of the Budget Law of the Saarland, however, this model
would comply with the regulations.
4.7 Interim Summary of the Governance Models under Discussion
Models 5 and 6 would be extremely innovative at present, even from the federal level, because there
is no alternative equity fund in the area of integrated urban development in Germany outside the
implementation of a KfW Bundesfonds. Because of its innovative character, this might in future open
up a special “start-up funding” by the federal government, if there are no comparable offerings created in other states. However, this should not be assumed at present.
Furthermore, due to its clear legal structure and the existing commercial experience with equity
funds, Model 5 would be preferred from the legal perspective, because it is clearly outside the application area of the KWG for one, and it meets the legal independence criterion set by the Structural
Funds regulation for another. In contrast, to comply with Article 43(2) of Regulation (EC) No
1828/2006, Model 6 can only be implemented if a separate asset also has legal capacity.
While the traditional orientation of UDFs towards lending (Models 1 and 2) is understandable, the
consequence is that they have to conform largely to the regulatory conditions of the KWG. Nonetheless, this fundamental, financial variation should not be dismissed. In the remainder of this study the
design of loan funds will be included in the analysis of the financial evaluation of project financing
and fund capital preservation.
Regardless of the regulatory conditions in KWG, Model 1 does not meet the requirements of Article
43(3) of Regulation (EC) No 1828/2006. An in-house model, which sets up a separate asset of the
state as a separate accounting entity in the form of a settlement account (paying agent model) is not
in compliance because such a separate asset of the state is not an independent legal entity but a
block of finance in the state. A legally dependent block of finance is only possible “within a financial
institution” according to the Structural Funds regulation.
Compliance with Art. 43(2) of
Regulation (EC) No 1828/2006
No
KWG approval required?
Yes
No. 2 – Loan fund at SIKB (modified inhouse solution)
No. 3 – Holding fund
Yes
Not if outsourced
Yes
Yes
No. 4 – Guarantee fund
Yes
Yes
No. 5 – Venture capital fund with own legal personality
No. 6 – Venture capital fund as separate
state asset
Yes
No
No
Yes
Model
No. 1 – In-house loan fund
Figure 10 – Evaluation matrix for governance models presented
Models 3 and 4 (guarantee fund and the additional establishment of a holding fund) are the only two
models which do not offer any additional financial value at the current time, which is why they are
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53
not considered in the further evaluation of the alternatives. At this point, it should also be noted that
these models would further require a banking license.
See Figure 10 for an evaluative overview of the diverse models.
4.8 Implementation-orientated enhancement of the Governance Models (“Nexthouse model”)
4.8.1
Starting point: Proposal of MEET Saarland – In-house loan fund
The MEET and MES proposed an in-house loan fund design for the implementation of the Saarland
Community Development Fund. The central element of this concept was fund management by an
administrative department within one of the ministries, which finances the selected projects by giving out loans. The SIKB would act as a “paying agent” for the loan sums. The lending decisions would
be made by the administrative department as the fund manager.
The motivation for the choice of this approach was that it could be rapidly implemented and that the
Saarland maintained influence over the management and the fund resources. Compliance with the
KWG should be ensured by involving the SIKB.
In concrete terms, the concept limited the activity of the fund to lending. Granting guarantees and
(venture) capital was excluded.
4.8.2
Demand – Which financial engineering instruments are wanted on the ‘market’?
Demand is an important issue in arranging the CDF and the financial engineering instruments it will
use. The main point is which financing possibilities are in demand for the individual projects the fund
should invest in. At first all the functions of a loan can also be handled using guarantees, dormant
partner’s interests and equity. Furthermore, most of the relevant target groups are even interested
in other financial engineering instruments. A look at the potential targets at the project level shows
the following points about demand:
•
Private and municipal companies are asking specifically for equity, hybrid and mezzanine
capital. This is also helpful for the company to garner additional capital, since better capitalisation makes it possible to borrow on the financial markets.
•
From the ministry’s perspective, municipalities without their own project or project management companies are interested in having revenues for their budget. Since it is not possible to invest equity in a municipality, only loans and guarantees can be used here.
•
No specific interest in guarantees could be identified in the market when loans and equity
were available as an alternative.
In terms of demand, the in-house model needs to be critically examined. Although equity is the main
request on the demand side, this financing engineering instrument is not initially being offered; a
later expansion of the offer is under discussion, but given how far along the programme period is, it
is doubtful that this is realistic. Against this backdrop, the design of a pure loan fund does not come
close to the interests of the target groups on the demand side.
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Legal implementation issues of in-house solution
In addition to evaluating how it matches the demand for financial engineering instruments, the legal
implementation of the in-house model must also be a selection criterion.
4.8.3.1
Compliance with the EU Structural Funds regulations
Model 1 is not in compliance with the relevant EU regulations. The general belief of the consultants is
that the solution presented as Model 1 in this evaluation study is not compliant with Art 43(2) of
Regulation (EC) No 1828/2006.
The financial engineering guidelines included in the Implementation Regulation require that the fund
either be an independent legal entity or be managed by a financial institution as a separate block of
finance.
Neither alternative is the case here. Involving the SIKB as a mere paying agent does not count as a
separate block of finance. Nor is the fund an independent legal entity as presented. In particular, it is
not possible to fall back on the legal personality of the Saarland as a “public corporation”. This was
already assumed by the regulation. The regulation requires an independent legal entity above and
beyond this. The individual arguments for this are shown in detail in Chapter 4 of this evaluation
study.
4.8.3.2
Requirement of approval according to the German Banking Act (KWG)
Even if one was to ignore the lack of compliance with Article 43(2) of Regulation (EC) No 1828/2006,
the in-house solution could not be implemented without getting independent approval according to
the KWG. Looking at the paying agent solution, the KWG license held by the SIKB cannot be used because the real lending decision is taken by the administrative department, so that it would have to
hold the KWG license. The only alternative would be to apply for an exception under § 2(4) KWG.
During the discussions, the point was raised that, in the current public attribution law based on § 23
LHO Saarland, ‘loans’ were extended without the state needing permission from the KWG. In the
federal state of Rhineland Palatinate, ‘loans’ were also extended to fund urban development as an
administrative act without a KWG license.
Looking at the LHO Saarland, it is clear that, according to LHO administrative regulations, handling
the allocation according to §§ 23, 44 LHO is a matter of public law. This applies primarily to the approval, which is basically handled per notice of appropriation of funding (A. regulatory provisions under § 44 to paragraph 1.4.1 VV-LHO; B. regulatory provisions under § 44 LHO on project funding allocations to local authorities and associations of local authorities VV-P-GK), by way of exception by
funding agreement, for which the regulations for notification of appropriations apply accordingly
(No 4.3 VV-LHO, No 4.3 VV-P-GK). The invalidity, revocation or cancellation of notices of appropriation, as well as the reimbursement of the funding and the interest on the refund, are determined according to the VwVfG (Administrative Procedure Act). Even if the lending was handled under civil law,
it could conflict with the requirements of the Structural Funds regulation. As long as the fund is not
an independent legal entity or run as a separate block of finance within a financial institution, its actions are not compliant with Article 43(2) of Regulation (EC) No 1828/2006. If it was independent, the
fund manager would not have the authority under the state’s budget law to initiate the administrative act in accordance with § 35 sentence 1 VwVfG at the first stage.
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4.8.4
55
Solution proposed by consultants – Equity fund (Model 5)
Based on the evaluations shown, the consultants proposed Model 5 in this evaluation study – a venture capital fund with its own legal personality. This would comply with the guidelines in Article 43(2)
of Regulation (EC) No 1828/2006. At the same time, it would not need a permit to invest equity capital according to the KWG. However, it would be unable to lend. One point of criticism is that it requires the fund managers to have certain management know-how, because investment venture capital normally involves the exertion of economic interest on the object of investment. The CDF is not
currently in a position to avail itself of these investor rights. In terms of the possible involvement of
private investor capital in the fund as foreseen, a bill was put forth on 3 May 2010 by the BMF for a
law to strengthen investors and improve functionality. The bill declares fund shares to be financial
engineering instruments. If the attraction of investment capital was set up in accordance with this,
there would be no legal KWG problems.
4.8.5
General solution agreed upon on 29 April 2010 – "Nexthouse" solution
After laying out the legal considerations on the evaluation of the in-house solution and showing the
implementation issues for the venture capital model, a modification to the venture capital approach
(Model 5) was developed, called the “Nexthouse” model. This should be understood as its own
model, based on Model 5. The main features are as follows (see Figure 11).
Figure 11 – "Nexthouse" model (Step 1)
An independent company in the form of a state organisation to be newly established represents the
urban development or community development fund. It would initially be wholly owned by the state.
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If establishing it this way is undesirable for budgetary or administrative reasons, an existing shell
company can be used. From the advisory standpoint, establishing a new company is recommended in
order to avoid taking over existing risks and, especially, to not have to separate the fund assets from
existing assets, since this would be little more than the block of finance reserved for the exclusive use
of financial institutions. It would also underline the role of the fund as an instrument of innovation.
•
Fund volumes: EUR 30 million. The decision for the large solution is based on the advertising
impact of such budgets among the municipalities and project developers. This should bring in
a much greater selection of projects to the fund.
•
The management of the company would conceptually belong to a ministry (the MES is especially well suited as an ERDF administrative authority), but would legally be in the hands of
(one or more) natural persons associated with a ministry, which would delegate them to the
company through a management contract.
•
The advisory committee of the company is composed of representatives of the Ministries for
Finance, Economics and the Environment.
•
Initially, “dormant partner’s interests” would be handed out to private project managers and
municipal companies13. This does not legally require the approval of the KWG if participation
in profits and losses is foreseen. Since in this case – as long as it is not set up as an atypical
dormant partner’s interest – there is no, or only limited exertion of influence on the management of the target company, it is not necessary for the fund to acquire additional knowhow.
•
Capital can be provided to municipalities without their own company in the form of investments in land or real estate transactions: conceivable models are the financing of leasehold
rights or land charges. In addition, it is always possible to continue funding following the allocation practices already in use.
The following is a potential way of expanding the concept (see Figure 12): The fund conducts a tender procedure to attract a private investor with a KWG license. This would create two synergies;
13
•
With the KWG license, the fund could extend loans. This would work if the CDF is run in the
legal form of a commercial partnership and the KWG-licensed partner takes on the role of
sole personally liable partner. In this case, the fund gains the character of an institution, with
the partner remaining the KWG licensee. It is possible for the administrative department to
continue managing the fund in this model through an outsourcing contract compliant with
the KWG.
•
With the additional project and management know-how of the private actor in the fund, a
further step is possible which does not seem unlikely from today’s perspective: changing the
“dormant partner’s interest” into a real venture capital investment with the corresponding
perception of the project on the side of management as an investment vehicle.
One characteristic feature of dormant partner’s interests is that they are viewed as equity investments at the project
level, but in contrast to normal equity investments, they include a flexible, predetermined repayment plan at a fixed
interest rate (like a loan) and a limited participation in profits at the end of the financing period. Insofar, the cash
flows for the fund hardly deviate from those of pure lending.
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57
Figure 12 – "Nexthouse" model (Step 2)
Figure 13 – How the Saarland Community Development Fund subsumes the current funding practices
In addition to subsidising urban development projects, the additional funding possibilities enabled by
setting up such a CDF include the investment of equity in the first step. By involving banking partners
in the investment company, these projects could then be funded with loans in the second step. Fig12.8.2010
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ure 13 illustrates the instruments to be used in addition to the current subsidies. This means that the
current funding practices should not be replaced by the new financial engineering instruments (substitution), but that there are no additional resources for these new instruments (addition).
During the meeting at the State Secretary’s office on 12 May 2010, the Saarland decided to further
pursue implementation of the “Nexthouse” model (Step 1) and set up the CDF in this structure by the
end of 2010. It is not to be set up as an independent company, but rather a subsidiary of the Strukturholding Saar (SHS), next to the already existing state-owned companies for business development
(gw Saar), project management (LEG Saar), commercial land management (SBB) and housing (WOGE
Saar). This new implementation structure can be seen in Figure 14. The only problem relevant to implementation regarding the planned use of dormant partner’s interests by the Saarland Community
Development Fund is still the limited accessibility of the municipalities, since they are not able to
profit directly from equity capital investment (or they would have to go through the complicated
process of establishing new municipal project companies to obtain CDF funding). The proposal subsequently made that the so established CDF also extends interest-free loans to the municipalities
does not work out, because the KWG still requires a license in principle if the CDF extends loans to
project companies or managers. This is true regardless of how the loan is financially set up, because
even interest-free loans fall under the application of the KWG (credit business). The situation is
somewhat different for purely subordinated loans, but such a restriction would not fit the model. The
consultants have already proposed Step 2 as a solution to this problem.
Figure 14 – Implementation of the "Nexthouse" model
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5
59
CONCRETE INTERVENTION POSSIBILITIES WITH JESSICA INSTRUMENTS
5.1 Identifying Business Areas of CDFs and their Significance for Urban Development Policy
The basis of the discussion on implementing a Saarland Community Development Fund was the result of conceptual work in regard to the sustainable development of the cities and communities of
the Saarland. The new instrument of an integrated community development concept should actively
face the challenges of demographic, economic and social structural change. At the same time, the
tight budget situation in the municipalities is understood. During the development of a guideline for
creating integrated community development concepts, the action strategies described in Chapter
2.1.2 were identified, becoming the topical focus.
Looking at real estate, a study on circular land use management (REFINA) in the Saarland was also
compiled to deal with the vacancy problems which are becoming increasingly more important for the
municipalities of the Saarland. The currently explosive situation of vacant and underutilised buildings
and land as a central problem of urban development policy was made even clearer during the project
identification process for this evaluation study.
Figure 15 – Business areas of the Saarland Community Development Fund
Based on these findings, future business areas for the Saarland Community Development Fund were
determined (see Figure 15). The business areas of “urban development and housing” and “business
and local supply” (“local business”) were taken directly from the action strategies for the develop12.8.2010
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ment of integrated community development concepts, since it was thought to be quite easy to find
projects in these areas with a certain profitability (in part) which should thus have been able to repay
their funding from the CDF within a certain time period.
Projects for the social and educational infrastructure and technical infrastructure, transportation and
the environment frequently represent investments for which financial returns are hardly possible
and thus for most of which subsidies are the most effective. For this reason, the two action strategies
were combined into a single central business area, infrastructure and the environment. As some projects subsequently reviewed show, in the greater area of infrastructure, there are indeed project
types with revolving aspects which are important to central urban and municipal development policy
and for which funding through the Saarland Community Development Fund can make a lot of sense.
Central areas of intervention in this segment are primarily supplying rural areas with high performance telecommunication infrastructures and more efficient energy generation and utilisation.
Finally, the central REFINA topic of brownfields was also included in the future activities of the CDF,
since this is extremely relevant to urban and municipal development policy in a region strongly impacted by structural change, like the Saarland. At the same time, redeveloping brownfields will involve the other three business areas of the Saarland Community Development Fund as well. Many
approaches to projects have failed because all the unpresentable costs were to be taken over by the
public sector while the project developer and property developer anticipated standard returns for
the industry and could therefore seldom find an alternative to subsidisation.
FIRU and KomCon selected “pilot projects” which match the various business areas as closely as possible. At the end of these efforts, a “project pipeline” for the business areas of the Saarland Community Development Fund had also been identified.
5.2 Evaluation Criteria in the Selection of Appropriate Starting Projects
5.2.1
Urban development policy evaluation criteria
In this chapter, all of those projects identified as part of the evaluation study will be presented which
can be considered for funding by the Saarland Community Development Fund. Depending on the
availability of data and their relevance to development policy and to the business areas of the CDF,
five pilot projects were identified which will be reviewed in detail and which form the foundation of
this evaluation study (see Figure 16 on the selection process and Figure 17 on the business areas).
Pilot projects
Selection
Urban development projects
Project pipeline
Figure 16 – Project selection process
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Project
Business Areas of the CDF
1. Fibre Optic flagship project in Dillingen
Infrastructure and the Environment
2. Terentiushof/Wilhelm-Heinrich-Straße Ottweiler
Urban Development
3. Local heating supply for the community of Nalbach
4. Spitzbunker City Hotel in Neunkirchen
Local Business
5. Revitalisation of pedestrian precinct in Lebach
Local Business
61
Figure 17 – Classification of projects in the business areas of the Saarland Community Development Fund
The projects (in the project pipeline) might be considered in future (once the ideas have matured and
more detailed data is available) for funding by the CDF (see Figure 18).
Project Pipeline
Business Areas of the CDF
Gesellschaft für Stadtumbau und Strukturentwicklung
Urban Development/Brownfields
Mettlach site development company
Brownfields
Revitalisation of the Bliespromenade in Neunkirchen
Local Business
Energy supply for the community of Losheim am See
Energy efficiency enhancement and energy supply for
the community of Illingen
Energy efficiency enhancement of sports and recreaInfrastructure and the Environment
tion hall in Saarwellingen
Saarfürst Centre in Merzig
Urban Development/Brownfields
Renovation of property in Wallerfangen
Urban Development
Figure 18 – Projects in the pipeline and their classification in the business areas of the CDF
The projects and their goals are briefly presented in terms of how they fit into urban development
policy. Their eligibility for funding is also reviewed: in terms of the guidelines of European law and
the Operational Programme ‘Saarland’ for the current programme period for one and the presence
of integrated community development plans for another. An integrated community development
plan – from which the project was developed or into which the project fits – has to be haptic; ideally,
it is an integrated community development concept as already described in Chapter 2.1. However,
this requirement for funding is also met if such a concept is being set up (or this will be begun in the
near future) or if the already existing, individual plans are technically or spatially interlinked between
business areas in such a manner that it can be assumed there is a holistic, integrated approach to the
planning.
5.2.2
Financial evaluation criteria
In order to be able to consider the selected pilot projects in terms of urban development policy independent of their financing – especially financing by the CDF – they should all be financially evaluated
in a comparable form on the basis of their cash flow structures. Initially, this analysis was done sepa12.8.2010
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rately. In the second step, the project cash flows were merged into a portfolio cash flow, which was
then also evaluated.
As the projects run over several years, the only method of comparing them was to use dynamic investment calculations, particularly the criteria of relative profitability, since the volumes and durations among the projects varied significantly.
To conduct an evaluation of the projects and the portfolio independent of the concrete project financing, the criterion of internal rate of return (IRR) was used. This also has the advantage of comparing the success of the project directly to the necessary capital expenditure (‘capex’) and therefore
also acts as an indicator of the efficient use of (scarce) capital. By implication, this is not synonymous
with a positive financial return from the project, as it measures whether the project is advantageous.
Rather, the calculated project returns have to be higher than their financing costs to result in a positive project difference.
By the effective annual yield percentage or internal yield (internal rate of return) of a project, one refers to the standardised rate of return i0, where the sum of the final revenues (E) equals the sum of
the final expenses (A). Clearly, the (sought for) internal rate of return is found by setting the final values in the formula to zero:
n
Cn =
∑ (E
t =0
n
∑ E ⋅ (1 + i )
n −t
t
t =0
0
− At ) ⋅ (1 + i0 )
n−t
t
n
=
∑ A ⋅ (1 + i )
n −t
t
0
t =0
The IRR thus denotes the profitability of the capital tied up in the project or the average of such.
Note, however, that for any investment project, this definition of the IRR as a indication of profitability is only valid insofar as the calculated IRR is identical to the actual financing cost rate (interest on
debit balances) and, at the same time, the actual profitability of interim reinvestments (interest on
credit balances). More will be written on this later.
As part of the financial review, the specific project cash flows for the five pilot projects of the Saarland Community Development Fund will first be calculated and used as a basis for determining the
returns on each project.
Finally, the legal framework which is important for the development of each pilot project will be assessed.
5.2.3
Legal evaluation criteria
Within the scope of the legal review of the project – and independent of particular questions specific
to one project – the following aspects of European and national legal guidelines are relevant.
In regard to the general conditions for using European funding (Regulation (EC) No 1083/2006), it
must be reviewed whether a project should be considered a large project in accordance with Article 39 (total investment of more than EUR 25 million for environmental projects, EUR 50 million for
all others), since they are financed from the ERDF differently than the “normal” smaller projects. Furthermore, it must be noted whether the ERDF funding and its co-financing will be used to finance
land acquisition. In this case, the possibilities for funding are limited to 10% of the land acquisition
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costs by Article 7(1b) of Regulation (EC) No 1080/2006 (exception: environmental protection measures).
State aid legislation on project funding first looks at whether the intended public municipal project
actors (municipalities or municipal companies) should be considered as market participants whose
funding would give them an advantage over other (also private) market participants. It is equally important to review in which private actors are way tied into the project level (e.g. through shares in a
municipal development company) and to what extent they would also gain an advantage over other
market participations through the planned project funding. When a public-private partnership is set
up to carry out the funded project, a tender procedure might also be mandatory.
Finally, when necessary for the project it must be clarified whether and under which conditions the
use of the CDF’s financial engineering instruments can be combined with other funding instruments
(e.g. KfW funding programme, urban development funding etc.).
5.3 Project level (model portfolio)
5.3.1
Fibre Optic flagship project in Dillingen
5.3.1.1
Presentation and classification under urban development policy
The Fibre Optic flagship project in Dillingen, under the Infrastructure and the Environment business
area, foresees the installation of a fibre optic infrastructure for the Rundwies and Dillingen-Nord industrial zones (see Figure 19) to strengthen the competitiveness of these sites.
Figure 19 – "Rundwies" (west of main road) and "Dillingen-Nord" (east) industrial zones (Source: KomCon)
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The funding from the CDF should serve as interim financing for the project, which will have to be
granted until the industrial zones have enough subscribers to be profitable. The city of Dillingen is
currently developing a community development concept (contract awarded at the end of 2009) into
which the project will be integrated. The project falls under Article 5(3b) of Regulation (EC) No
1080/2006 of the European Parliament and of the Council dated 5 July 2006 on the ERDF “promoting
access to, take up, and efficient use of ICTs by SMEs by supporting access to networks, the establishment of public internet access points, [...]”, since the project entails enabling local businesses to access information and communication technologies. According to the current Operational Programme
‘Saarland’, the project is classified under priority axis 2, business area 4 (“Stimulating structural
change through knowledge-based business, innovation and development of specific strengths – Culture of innovation, qualification and access to ICT infrastructure”). This reaffirms the eligibility of the
project for funding by the CDF.
5.3.1.2
Financial analysis
The gradual connection of 50 current and about 15 new coming businesses creates potential income
which can be used for revolving financing by a UDF. At present, their telecommunication mainly occurs via copper wiring. All carriers should be able to compete for the use of the new infrastructure.
The recipients of the financing are the Stadtwerke Dillingen public utilities, a municipal holding company held by the city of Dillingen (51% of shares) and Energis GmbH (49%).
600.000
500.000
Income
400.000
Expenditures
300.000
200.000
100.000
0
2010 2013 2016 2019 2022 2025 2028 2031 2034 2037
Figure 20 – Business plan of Fibre Optic Lighthouse project in Dillingen
KomCon estimates that a one-time investment of EUR 540,000 is needed to make the telecommunication infrastructure available. Implementation of the measure is judged to be timely, and the infrastructure should be complete in a period of nine months. Therefore, the following assumes that the
investment will be made in 2010 and that revenues can already be expected by the end of 2011. In
regard to revenues, KomCon projects that five new buildings can be connected and supplied by a carrier each year. At the estimated number of 65 commercial businesses to be connected, this means
the maximum amount of revenue can be generated after 13 years, or from 2023 on. With a basic fee
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of EUR 30 per month per subscription plus a premium of 10% of the carriers’ total sales, the average
annual revenues are estimated at EUR 960 per subscription. This results in steadily growing revenues,
reaching a maximum of EUR 62,400 from 2023 on. The projected duration of use for the telecommunication infrastructure is 30 years; after this duration, the investment is considered completely depreciated, so no fictional residual value has been calculated (see Figure 20).
This project is shown to be viable under the given assumptions, since it results in a project rate of return (as measured using the project IRR) of around 6.38%. Although this return would be (barely)
commercially viable, it must be noted that the full amount of the revenues is not reached until 13
years have passed, meaning that if e.g. a commercial bank loan, which has a much shorter grace period (i.e. interest-free years at the start), were taken out, it would be necessary to find interim financing.
Furthermore, there are two other factors which put the profitability into perspective. For one, the effects of inflation have been abstracted from the calculation of revenues. If this is integrated into the
calculation because of the very long duration of the project, it becomes clear that the price index for
telecommunication has even been negative over the last 10 years. As the Federal Statistical Office’s
price index for communications for 1999 to 2009 shows, by the end of this period it had fallen to 75%
of its original price (cf. www.destatis.de, Consumer Price Index No 8, Communication). The reverse
conclusion is that the revenues would not even remain at their nominal amount, assuming a similar
price trend in future. For another, it must be considered that the total duration of the CDF was assumed to be 20 years, whereas this project was projected to last 30 years. With duration of only 20
years, the return on the project falls to 4.69%.
In principle, the periodic repayments from the project from the revenues for the basic fee and the
additional, sales-related charges allow it to receive long-term equity capital from the UDF. The repayment schedule to the fund should be adjusted to match the project cash flows, however, so that,
except for the interest portion, no or only a minor amount of repayment is scheduled during the
start-up years. The cash flows would appear as calculated in the following (see Figure 21).
Year
2 0 10
2 0 11 2 0 12
Cash flo w -540.000 4.800
2 0 13
2 0 14
2 0 15
2 0 16
2 0 17
2 0 18
2 0 19
2020
2021
2022
2023
2024
...
2032
9.600 14.400 19.200 24.000 28.800 33.600 38.400 43.200 48.000 52.800 57.600 62.400 62.400 62.400 62.400
Figure 21 – Cash flows from Fibre Optic Lighthouse project in Dillingen (in euro)
5.3.1.3
Legal analysis
In terms of volume, the investment is not considered a large project according to Article 39 of Regulation (EC) No 1083/2006. Moreover, no land acquisition is foreseen in this project, so that Article 7(1b) of Regulation (EC) No 1080/2006 does not apply.
In addition to the municipal investment company of the city of Dillingen, the private company Energis
GmbH should own 49% of the project, so it is important in any case to ensure that the financing
through the CDF is in compliance with state aid laws. It must also be noted that, depending on the
division of shares in the business and the sphere of action, a municipal investment company can also
be viewed as a market participant and thus as a recipient of aid.
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5.3.2
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Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler
5.3.2.1
The community of Ottweiler is developing the Terentiushof redevelopment area and the connecting
street Wilhelm-Heinrich-Straße on its own initiative in preparation for the planned relocation of the
adjacent Federal Highway 41 underground. The area lies on the edge of the historic old city centre.
Wilhelm-Heinrich-Straße is one of the primary shopping streets in the inner city. The largest building
in the area is the former Ottweiler Department Store, which stretches between Wilhelm-HeinrichStraße and Federal Highway 41 (see Figure 22).
In 2009 an urban development framework was developed for the Terentiushof and the WilhelmHeinrich-Straße. The primary urban development goals were to clear the interior of the Terentiushof,
redevelop and redesign it. It also included redesign measures for the Wilhelm-Heinrich-Straße and
the land to be restored after the relocation of Federal Highway 41.
Figure 22 – Terentiushof and Wilhelm-Heinrich-Straße project in Ottweiler (Source: city of Ottweiler)
The CDF funding serves to raise the necessary investment costs. At the same time, the city makes its
contribution by resorting to urban development subsidies. Cash flows are expected to come from the
sales proceeds for the redeveloped land and from running the newly developed car park. The city of
Ottweiler is currently developing community development concepts for some parts of the city and,
once the decision to set up a CDF in the Saarland is taken, it is ready to prepare such a concept for
the city centre right away. There is already an urban development framework for the redevelopment
area which the new conceptual plans can directly refer to. The project falls under Article 8 of Regulation (EC) No 1080/2006 of the European Parliament and of the Council dated 5 July 2006 on the
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ERDF, “These strategies shall promote sustainable urban development through activities such as:
strengthening economic growth, the rehabilitation of the physical environment, brownfield redevelopment, the preservation and development of natural and cultural heritage, the promotion of entrepreneurship, local employment and community development, and the provision of services to the
population taking account of changing demographic structures”, since it involves revitalising and
thereby repurposing a traditional but underutilised building structure in the inner city area. According to the current Operational Programme ‘Saarland’, the project is classified under priority axis 3,
business area 1 (“Sustainable urban and regional development and resources protection – Sustainable urban development”). This reaffirms the eligibility of the project for funding by the CDF.
5.3.2.2
Financial analysis
The project of the city of Ottweiler in the Terentiushof area, which includes transforming the
Wilhelm-Heinrich-Straße, involves reshaping an entire neighbourhood, which is why it is classified
under the business area of “Urban Development”. The measures for accounting and thus financing
by the fund are only those which primarily resemble land development. The financing recipient is the
municipality through the city of Ottweiler.
In detail, the capital expenditure based on the estimates of KomCon first includes the acquisition of
the land on which the department store currently stands for EUR 630,000 and for the land readjustment and removal of the department store for EUR 200,000. One alternative might be an agreement
with the private owners, so that the land would not have to be acquired by the city; however, this is
assumed in the following due to the lack of information otherwise. In addition, there is capex for setting up the public infrastructure, including creating parking spaces and green spaces for approx.
EUR 170,000 and for rearranging and developing the Wilhelm-Heinrich-Straße for approx.
EUR 600,000. Further intended capex for the existing property at Wilhelm-Heinrich-Straße 35 to expand the library and for housing in the upper stories has not been reflected, as the project actors will
attempt to find private investors for these purposes. The total investment amount comes to
EUR 1.6 million.
This capital expenditure is offset by potential revenues from the sale of the buildings along Federal
Highway 41. With 2,000 m2 of space at an estimated sales price of EUR 100 per square metre, the total sales proceeds could be EUR 200,000. Moreover, rental income for the parking spaces created on
the Wilhelm-Heinrich-Straße is calculated at EUR 15,000 per annum. Furthermore, the sale of the
buildings at Wilhelm-Heinrich-Straße 31 to 35 might bring in another EUR 225,000, which could also
be used to repay the fund. Thus, in the year of the sale, the three cash flow components combined
total revenues of EUR 440,000, which could be used to repay the fund.
As urban development funding can be counted on to subsidise EUR 645,000 of the total capital expenditure of EUR 1.6 million, and the city will contribute its share of EUR 330,000, EUR 625,000 is left
to be financed by the UDF. Splitting this evenly over the proposed construction period of three years
means capex of EUR 208,333 per year. The financed amount should be repaid within 20 years. The
time of the potential sale of the building projects on Federal Highway 41 cannot be determined exactly ex-ante, but the city assumes that the properties will be sold in a timely manner because the
public investment functions as a beacon. If it is assumed in the most optimistic of all cases that the
property is sold right after completion of construction, the revenue-expenditure progression would
look as follows (see Figure 23).
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500.000
450.000
400.000
Income
350.000
Expenditures
300.000
250.000
200.000
150.000
100.000
50.000
0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Figure 23 – Business plan for the Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler (in euro)
Calculating the investment’s IRR in regard to the total sum of EUR 1.6 million, it is somewhere below
–100% and thus not defined. Looking only at the amount invested by the CDF totalling EUR 625,000
in capital expenditure over the years 2010 to 2012, however, yields a minimum positive project IRR
of 0.39% for the following concrete cash flows (see Figure 24).
Year
Cash flow
2010
-208.333
2011
-208.333
2012
-208.333
2013
440.000
2014
15.000
2015
15.000
...
15.000
2029
15.000
2030
15.000
Figure 24 – Cash flows for the Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler (in euro)
This makes it a classic “B-list project”, since there are revenues and returns, but these are far from
being high enough for commercial land and project development. It should be noted at this early
stage that the project return for a revenue-generating project has to be higher than the financing
rates, which is why it is clear here that commercial project financing at market rates would mean
high losses in the project. If, contrary to the assumptions made, it was assumed that it would not be
possible to sell the buildings along Federal Highway B 41 until the end of the project duration, the
project’s IRR would drop to –2.95%.
5.3.2.3
Legal analysis
This is also not a “large project” according to Article 39 of Regulation (EC) No 1083/2006.
It does, however, foresee the acquisition of land. The capital to be provided by the CDF amounts to
EUR 630,000. According to Article 7(1b) of Regulation (EC) No 1080/2006, the important point is that
the CDF does not use more than 10% of ERDF monies deposited there to finance land acquisition.
This restriction does not apply to the projects. Moreover, note that this restriction only applies to the
ERDF funding. Since, in addition to the EUR 20 million in ERDF funding (including national cofinancing), the CDF holds another EUR 10 million from the CEB, it has plenty of flexibility. Nonetheless, this threshold has to be considered when selecting additional projects.
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As, according to the current plans, the city of Ottweiler itself as a municipality should be the funding
recipient, the circumstances are not a problem from the perspective of state aid legislation. Note,
however, that this is only true if no private partners are involved at the project level.
5.3.3
Local Heating Supply project for the Community of Nalbach
5.3.3.1
The first phase of the Local Heating Supply project for the Community of Nalbach foresees investment in a central heating supply facility which, when complete, will heat the following public services: city hall, secondary school, kindergarten and an event hall. In contrast to the current oil and
gas heating supply, the new facility will burn renewable energy sources in the form of wood chips.
Like the Fibre Optic flagship project in Dillingen, this is an investment in the business area of “Infrastructure and Environment”. There could be a second construction phase in the medium term,
whereby approx. 125 homes would also be connected to the new heating supply grid. However, this
is not reflected in the following, more detailed look at and calculations for the project.
The CDF funding serves to help cover the total adjusted implementation costs. Cash flows are expected from the savings enabled by the cheaper energy supply. Implementation could begin in 2010,
with a proposed implementation period of 12–15 months. The project is part of the development
concept drafted in 2005; the community could rapidly make any necessary amendments to the concept based on the existing information basis. The project falls under Article 5.2c of Regulation (EC) No
1080/2006 of the European Parliament and of the Council dated 5 July 2006 on the ERDF “stimulating energy efficiency and renewable energy production and the development of efficient energy management systems”. In accordance with the current Operational Programme ‘Saarland’, the project is
classified under priority axis 3, business area 3 (“Sustainable urban and regional development and resource protection – Promotion of future-oriented energies and the efficient use of resources”). This
reaffirms the eligibility of the project for funding by the CDF.
5.3.3.2
Financial analysis
The new local heating supply for the community of Nalbach represents a transformation in energy
supply. By lowering the heating costs through the use of renewable energy sources, the resultant
savings could be used to refinance the capital expenditure. Who will receive the funding has not fully
been determined yet. It would be conceivable to establish a company under private law for the construction and subsequent operation of the plant, in the sense of a public-private partnership (PPP)
into which various investors could be brought together.
The capital expenditure for the heating supply plant is broken down in Figure 25). It has been calculated that setting up the heating supply plant would require capex of EUR 748,500. Since investment
in renewable energies is one focus of the funding activities of the KfW bank, the wood chip plant and
local heating supply lines are eligible for KfW subsidies, which lowers the amount to be financed by
the CDF to EUR 668,000.
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Plant equiment with automatic control
233.000
Additional wood-fired boiler system
32.700
Gas connection costs
22.200
Underground lines and earth works
191.000
Arrangement of technical building
200.000
Electrical installations
19.400
Central building control system
46.000
Additional overhead expenses
4.200
Total setup expenses
748.500
Funding for wood chip heating system
12.500
Funding for local heating supply lines
68.000
Capital expenditure for fund
668.000
Figure 25 – Breakdown of capital expenditure for the heating supply plant (in euro)
To calculate the potential cash flows to the CDF, the fuel savings from the partial switch to renewable
energies have to be quantified in kWh (see Figure 26).
Usage in kWh p.a.
Status Quo
After investment
85.000
72.500
Secondary school
386.000
330.000
Event hall
476.000
405.000
City hall
650.000
260.000
1.597.000
1.067.500
Kindergarten
Total
Figure 26 – Reduction in energy needs due to heating supply plant
The annual savings through the new heating supply plant can be quantified at 529,500 kWh. Note,
too, that the fuel volumes are not the only thing to sink; the fuel costs fall as well. While the prices
for oil in 2008 averaged 6.53 cent per kWh and gas even cost 7.44 cent per kWh, the average price
for wood chips was only 3.91 cent per kWh. It is not possible to completely switch over to wood
chips; rather the previous mixture of oil and gas is replaced by a mixture of wood chips and gas.
Combining this with the reduced volumes and fuel costs, the energy costs could be lowered from
EUR 105,400 to EUR 64,300 p.a., leaving annual savings of EUR 41,100 available as cash flows to the
UDF. In view of Figure 26, these savings are the result of changes in both consumption and fuel. Formerly, 1.597 million kWh p.a. were used at a ratio of 95% oil to 5% gas at the prices given above; now
only 1.0675 million kWh are used at a ratio of 41% wood chips to 59% gas. The intended duration of
the CDF financing over 20 years generates the following revenue-expenditure progression (see Figure
27).
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400.000
350.000
300.000
Income
250.000
Expenditures
200.000
150.000
100.000
50.000
0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031
Figure 27 – Business plan for the Local Heating Supply project for the community of Nalbach (in euro)
According to the information of KomCon, construction should begin as soon as possible and thus already in 2010. With a construction period of 12 to 15 months, the savings could already begin in
2012. Figure 27 assumes the capital expenditure totalling EUR 668,000 is split in equal parts of
EUR 334,000 each in 2010 and 2011. Assuming constant revenues over the 20-year duration of the
investment in the Local Heating Supply project for the community of Nalbach, this results in a project
IRR of 2.34%. Since the project yield based on this IRR again reflects zero financing costs, it is clear
that this is another classic B-list project with moderate cash flows which would generate a loss if a
commercial bank loan were needed. The project yield could be raised, however, if an increase in energy prices were also included in the calculation. Based on the average annual energy price increases
over the last 10 years, the price would rise by 2.07% p.a. (cf. www.destatis.de, Consumer Price Index
No 4 for Rent, Water, Fuel and Power, average of 2000 to 2009 period). In this scenario, the project
IRR would be lifted to 4.16%. Since there is a great level of uncertainty about future energy price
trends, however, the following does not reflect energy price increases and figures are based on cash
flows at a project yield of 2.34% (see Figure 28).
Year
Cash flow
2010
2011
2012
...
2030
2031
2032
-334.000 -334.000 41.100 41.100 41.100 41.100 41.100
Figure 28 – Cash flows for the Local Heating Supply project for the community of Nalbach (in euro)
5.3.3.3
Legal analysis
In terms of volume, this investment is not a “large project” according to Article 39 of Regulation (EC)
No 1083/2006. No land acquisition is foreseen for this project, so Article 7(1b) of Regulation (EC)
No 1080/2006 does not apply.
At the time of appraisal, the funding recipient had not been determined. In particular, implementing
it within the scope of a PPP together with partners from the private sector was under discussion. In
regard to this decision, it should be mentioned at this early stage that, depending on how the partnership is to be set up, a tender procedure might be required. It has to again be emphasised that the
partnership must be reviewed from the perspective of state aid legislation as soon as a private actor
benefits from the financing.
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In terms of the planned combination with KfW financing, it has been determined that combining
ERDF funding with other funding instruments is not a problem according to the Structural Funds
regulations. However, it will have to be reviewed to see if the KfW financing includes any conditions
which might conflict with the guidelines of the Structural Funds regulations.
5.3.4
Spitzbunker city hotel project in Neunkirchen
5.3.4.1
The redevelopment of the Spitzbunker site in Neunkirchen includes setting up retail space and attracting a hotel, for which a developer but no operator has been found (see Figure 29). Within the
scope of potential CDF funding, the operating rents on the site should be reasonable to assist development of the hotel. Its development and operation should be imparted via public tender procedure,
and the willingness to use funding from the CDF for financing should be part of the invitation to tender.
Figure 29 – Planned hotel and retail usage of the Spitzbunker site (source: KomCon)
The CDF funding serves to cover part of the investment costs and thereby reduce the ongoing costs
of capital. Cash flows are expected from the operation of the hotel (revenues from accommodations
and board). The project is part of the Urban Development Concept 2020. It falls under Article 8 of
Regulation (EC) No 1080/2006 of the European Parliament and of the Council dated 5 July 2006 on
the ERDF “these strategies shall promote sustainable urban development through activities such as:
strengthening economic growth, the rehabilitation of the physical environment, brownfield redevelopment, the preservation and development of natural and cultural heritage, the promotion of entreEIB Evaluation Study Saarland Community Development Fund – Final Report
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preneurship, local employment and community development, and the provision of services to the
population taking account of changing demographic structures”, as the attraction of a hotel will
strengthen local business and tourism. In accordance with the current Operational Programme ‘Saarland’, the project is classified under priority axis 3, business area 2 (“Sustainable urban and regional
development and resource protection – Expansion of tourism infrastructure through the development
of natural and cultural heritage and the creation of additional growth potential”). This reaffirms the
eligibility of the project for funding by the CDF.
5.3.4.2
Financial analysis
In addition to retail space, a hotel should be developed upon the Spitzbunker site in Neunkirchen, its
construction should be financed by the CDF. This is a classic building project for a speciality property
classified under the business area of “Local Business”. The revolving element required for financing
by the CDF comes from the revenues for providing board and accommodation to hotel guests. The
funding recipients are the investors of the hotel, who would first have to put up an investment
amount of EUR 1 million from private sources to finance the purchase price of the land and ancillary
construction costs. The final investor and the subsequent operator of the urban hotel should be
found via a European-wide tender procedure.
2.500.000
2.000.000
1.500.000
Income
1.000.000
Expenditures
500.000
0
2010 2012 2014 2016 2018 2020 2022 2024 2026
Figure 30 – Business plan for the Spitzbunker urban hotel project in Neunkirchen (in euro)
In detail, this is the construction of a five-storey hotel with 40 double rooms. The one-time capital
expenditure for the construction of the hotel amounts to EUR 4.3 million according to the estimates
of a project developer based in the Saarland. This partial financing should come from the CDF and
the additional, aforementioned investment sum of EUR 1 million will presumably be financed from
the equity capital of the investors, so the CDF should (only) provide the direct construction costs. To
calculate the ongoing revenues from the hotel operation, it is assumed to be running at 65% of capacity. Assuming an average price of EUR 68 for an overnight stay, reflecting the charge for double
rooms, their rental as single rooms and special conditions for travel groups, the assumed capacity
utilisation of 65% results in calculated sales revenues from overnight stays and breakfast of
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EUR 650,000 p.a. In addition, the sale of food and beverage is assumed to count for EUR 250,000
p.a., bringing total calculated revenues from hotel operation to EUR 900,000 p.a. In turn, yearly running costs for personnel, materials and energy are calculated to be EUR 525,600, though KomCon did
not break this figure down further. Further assuming the construction costs totalling EUR 4.3 million
are split evenly between the years 2010 and 2011, this results in the following revenue-expenditure
progression (see Figure 30).
Based on these premises, with the twelve-month construction period beginning in 2010, and looking
at a period of 15 years, the project IRR for the urban hotel is 3.93%, given the concrete cash flows
shown in Figure 31.
Year
Cash flow
2010
2011
2012
2013
...
2027
-2.150.000 -2.150.000 374.400 374.400 374.400 374.400
Figure 31 – Cash flows for Spitzbunker urban hotel project in Neunkirchen (in euro)
In considering this moderate yield, which is still well below that of commercial project financing, several points need to be kept in mind. First, it is clear that the revenue potential is determined by the
capacity utilisation assumptions for the hotel. It is therefore quite unclear whether the planned utilisation rate of 65% can be reached. Furthermore, the calculation does not consider price increases
(personnel, materials, energy expenses, as well as room prices). Finally, it must be considered that
the resulting net revenues are not only for the CDF; the other investors require returns on their capital employed. In this project, they are still investing EUR 1 million. Therefore, only approx. 81% of the
total investment (EUR 5.3 million) need to be financed through the CDF, which will thus get only that
share of the cash flows.
5.3.4.3
Legal analysis
In terms of volume, this investment is not a “large project” according to Article 39 of Regulation (EC)
No 1083/2006. No land acquisition is foreseen for this project, so Article 7(1b) of Regulation (EC)
No 1080/2006 does not apply.
As is clear in the project description, the EUR 1 million needed for land acquisition should come from
the hotel operator as equity capital. The funding from the CDF totalling EUR 4.3 million should exclusively be used to finance the construction measures themselves. It something changes in this setup,
this has to be considered at the fund level. Since there is only one other project which contains land
acquisition funding at present, there is still plenty of flexibility.
State aid laws also have to be complied with in this project, because involving private investors is a
central component of its implementation.
5.3.5
Revitalising the pedestrian precinct in Lebach
5.3.5.1
The vacancy rates in the inner city of Lebach are high and steadily rising. Without a fundamental redesign, especially of the public areas, this downward spiral cannot be turned around. The return of
specialist retailers and service providers is unrealistic until comprehensive revitalisation measures
have been carried out. Investment is planned in the reconstruction of traffic roads, the creation of
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more parking spaces and in public amenities and greenery. In the following, the project is classified
under the business area “Local Business”.
The CDF funding serves to pre-finance the investment costs, which should be refinanced through the
cost savings for maintaining the existing structures. The construction is expected to take 15 months.
The city of Lebach began to create a community development concept in 2008. It should be complete
in the middle of 2010. The revival of the inner city plays a central role in the concept. The project falls
under Article 8 of Regulation (EC) No 1080/2006 of the European Parliament and of the Council
dated 5 July 2006 on the ERDF “these strategies shall promote sustainable urban development
through activities such as: strengthening economic growth, the rehabilitation of the physical environment, brownfield redevelopment, the preservation and development of natural and cultural heritage, the promotion of entrepreneurship, local employment and community development, and the
provision of services to the population taking account of changing demographic structures”, as it entails the revitalisation and thus repurposing of an historical and underutilised building in the inner
city. In accordance with the current Operational Programme ‘Saarland’, the project is classified under
priority axis 3, business area 1 (“Sustainable urban and regional development and resource protection
– Sustainable urban development”). This reaffirms the eligibility of the project for funding by the CDF.
5.3.5.2
Financial analysis
The recipient of the financing is the municipality, either the city of Lebach directly or, alternatively,
the real estate company Lebacher Grundstücksgesellschaft mbH & Co. KG, a wholly owned subsidiary
of the city. In detail, the following measures have to be carried out to revitalise the area, most of
which is brownfield (see Figure 32).
Revitalisation measures:
Reconstruction of “Am Markt” street
200.000
Rconstruction of car park between “Am Markt and Theel flood wall
160.000
Construction of new car park at the entrance of the pedestrian precint
120.000
Addition of traffic street at the entrance of the pedestrian precinct
280.000
Construction of rear car park
200.000
Street furniture
100.000
Plantation
140.000
Total amount
1.200.000
+ 20% ancillary costs
1.440.000
Figure 32 – Capital expenditures for revitalising the pedestrian zone in Lebach (in euro)
The table shows that the needed investment totalling EUR 1.44 million refers exclusively to the beautification of the public space, including the greenery. Assuming that the parking spaces to be created
will be free of charge, it is clear that this investment in public infrastructure will not generate any
revenues. Therefore, this is the development of a purely public space in the form of a non-revenuegenerating C-list project. In this regard, it might be possible to link funding from the CDF to
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EUR 460,000 in urban development subsidies, thereby reducing the investment volume to be financed by the CDF to EUR 980,000.
In order to make it possible for the CDF to finance the project despite the lack of revenues, the following assumes the investment will save the city EUR 80,000 p.a. by its own estimate. This amount
has been spent on average over the last three years to handle incidental repairs in the desolate inner
city of Lebach, e.g. due to vandalism. Assuming construction begins in the middle of 2011 and takes
15 months, the result is the following revenue-expenditure progression (see Figure 33).
600.000
500.000
400.000
300.000
Income
Expenditures
200.000
100.000
0
2012 2014 2016 2018 2020 2022 2024 2026
2011 2013 2015 2017 2019 2021 2023 2025
Figure 33 – Business plan for revitalising the pedestrian zone in Lebach (in euro)
Under the assumptions in Figure 33 that the CDF only finances EUR 980,000 in capital expenditure –
divided equally over 2011 and 2012 – a project IRR of 3.33% is calculated with the following concrete
cash flows (see Figure 34).
Year
Cash flow
2011
2012
2013
2014
...
2020
-490.000 -490.000 80.000 80.000 80.000 80.000
Figure 34 – Cash flows for revitalising the pedestrian zone in Lebach
If it is instead assumed that the full EUR 1.44 million is financed by the CDF, the project IRR would
drop into the red at –1.35%. Like the other projects, a yield of 3.33% defines this as a classic B-list
project, which would be a disadvantage for finding market-rate financing.
5.3.5.3
Legal analysis
This investment is also not a “large project” according to Article 39 of Regulation (EC) No 1083/2006.
No land acquisition is foreseen for this project, so Article 7(1b) of Regulation (EC) No 1080/2006 does
not apply.
Investment in projects which have no returns per se cannot be understood by state aid law as the
equivalent of an action taken by a commercial investor, so this can clearly be a subject of state aid in
principle. In regard to this concrete project, the lack of revenue generation is not a problem under
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state aid law as long as the municipality remains the direct recipient of the financing, since there
could be no disadvantage to participants in commercial competition in this case. This should also apply if the city’s real estate company takes the position of financing recipient. This assumes that the
real estate company, as a subsidiary of the municipality, only undertakes public spending and does
not operate in other business areas as a commercial competitor in the market.
5.3.6
“Pipeline Projects”
Gesellschaft für Stadtumbau und Strukturentwicklung (GfSS)
The GfSS, an urban redevelopment and structural development company, should bring together
smaller, individually parcelled vacant plots of land in small and medium-sized communities and develop them through portfolio policies which activate the money brought in by profitable properties
added to the portfolio. This tackles a core problem of urban and municipal development in the Saarland. The company could be a subsidiary of the LEG Saar and other public and private partners might
be enticed to join, such as the Association of Towns and Municipalities, the Entsorgungsverband Saar
(association of disposal), municipal housing authorities, the SIKB and private actors.
The company’s business model shown in Figure 35 includes the identification and assessment of land
and sites, a future-oriented on-spot acquisition policy, project development and marketing, building
law and approval management, facility management and external management services for other
land portfolios.
To date, this is nothing more than a basic idea. During the process of implementing the CDF, the
Saarland can consider how it might make sense to set up such a company in combination with the activities of the fund, what it would look like in concrete terms, and which actors might get involved.
Figure 35 – Business model of the Gesellschaft für Stadtumbau und Strukturentwicklung (Source: FIRU mbh 2009)
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Mettlach Site Development Company
The community of Mettlach has been interested in developing the site of the former (Villeroy &
Boch) mosaic factory for years. To date it has not been possible to align the divergent interests of the
community and the owner in terms of how to develop the property. During the process of preparing
this evaluation study, the consultants proposed a cooperative development model to the actors on
site which could also be supported by the CDF.
Figure 36 – (Villeroy & Boch) Mosaic tile factory in Mettlach
Figure 37 – Cooperative development model for the mosaic tile factory in Mettlach (Source: FIRU mbH 2009)
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Together, the municipality and the owners establish a site development company and split the costs
for preparing, clearing and zoning the land according to their share of ownership in the company. In
addition to potential support from the CDF, other funding (grants) might be obtained from the state.
This construction has significant advantages for both parties: the community is directly involved in
the development without the problems inherent in owning it and the owners get easier access to
funding and are thereby supported in developing the property. The yields for the development could
be shared between the two partners (see Figure 37).
Both the community and the owner were in agreement with the model. The project development
will first have to be examined as part of an evaluation study before the project is mature enough to
be eligible for CDF funding. The first preparatory measures for thus are currently underway.
Revitalisation of the Bliespromenade in Neunkirchen
Since the end of 2009, two large retail properties on the Bliespromenade (around 6,000 m² of floor
space) have stood vacant in the city centre of Neunkirchen. To revitalise the site and meaningfully restructure (or successfully repurpose) the property, there are plans to redesign the adjacent Blies embankment (create public areas and bring it to life). The costs for this are currently estimated at
EUR 1.5 million, which are also eligible for subsidisation through an urban development funding programme. The entire project should be implemented in a period of five years, which requires close
cooperation with the owners (and potentially the new users). The community will have to be active
in this regard. In this context, CDF funding would most likely apply to the restructuring/revitalisation
of the retail properties, since this is the only part to generate cash flows for the fund. In return for
the potential funding, the property developers can participate in the design measures.
Energy supply for community of Losheim am See
More renewable energies for, and a more efficient, local energy supply are to be used in the community of Losheim am See. A combined heat and power plant shall be developed in the town centre
to supply several homes and a day care centre via local heating supply lines. There are plans to develop a cooperative wood chip burning power plant for the district of Britten to provide energy and
heat to both a large nursing home and a large part of the district. Innovative elements will be chosen
for the energy generation and the controlling technology, accompanied by the University of Applied
Sciences in Saarbrucken. Once the project concept has become more concrete, it can be examined to
determine eligibility for funding by the Saarland Community Development Fund.
Energy efficiency enhancement and energy supply for community of Illingen
The town hall in the community of Illingen is to be renovated at an estimated cost of approx.
EUR 480,000. In return, the future energy savings will be approx. EUR 6,000 p.a., which makes it clear
that, due to the minor possible cash flows, only a small part of the investment costs can be borne by
the CDF. However, it is a commonly known project type.
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Furthermore, the development of a biomass power plant to supply power to an industrial area is under review. The investment costs were estimated at EUR 4 million; so far it is still unclear whether
the project itself is marketable or whether it requires funding.
Energy efficiency enhancement of sports and recreation hall in Saarwellingen
The sports and recreational hall built in 1972 had to be partially renovated in 2008 due a miningrelated tremor on 23 February 2008. As part of the further renovation of the ceiling, ventilation system and lighting system, a PV system shall be installed on the roof of the hall. The solar energy fed
into the grid might provide the necessary cash flows for the CDF funding. As the investment cost estimates are still quite imprecise and the expected maintenance costs have not been submitted, the
project could not be brought in directly as a pilot project.
Saarfürst-Centre in Merzig
Figure 38 – Aerial view of construction areas in the Saarfürst Centre in Merzig (source: OBG Projekt GmbH & Co. KG)
In the period during which this evaluation study was being prepared, the OBG Projekt GmbH attempted to develop a higher standard, inner city residential neighbourhood on the Saarfürst site in
Merzig. The one-sided utilisation structure of the project, which made it ineligible for ERDF funding,
also disqualified it for funding by the Saarland Community Development Fund. At the start of 2010,
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however, this concept fell through due to the lack of demand14. A utilisation concept for the land
must now be developed which upgrades the inner city and includes other usages such as office,
commercial and retail space. Since the market chances for these uses were assessed to be negative
preliminary to the first concept, it should be assumed that funding will be necessary to develop the
site. Once the new concept has become more concrete, it should be reviewed to determine the extent to which it makes sense to involve the CDF in this project.
Renovation of property in Wallerfangen
Directly in the centre of the community of Wallerfangen, the former Goldener Schwan inn stands vacant (see Figure 39). The historically listed building included a restaurant which closed more than one
year ago and a large ballroom (incl. additional dining rooms) which has not been usable for structural
reasons since the 60s.
Funding the rehabilitation of this hallmark building would not only be meaningful from the perspective of the protection of monuments, but would also be important to the local gastronomy. According to the community administrators, there is also demand for the ballroom, since most local events
do not come close to filling the capacity of the large event hall on the edge of the community. The instruments of the CDF could be used as start-up funding to revitalise the property. There have already
been interested investors, though the community has not been informed of any concrete offers to
buy (since it is a listed building, the city has pre-emption rights).
Figure 39 – Goldener Schwan inn in Wallerfangen
14
“Vermarktungskonzept blamabel für die Stadt”, (marketing concept embarrassing to the city), article in the
Saarbrücker Zeitung dated 19 March 2010, No 66, Regional section for Merzig-Wadern district, page C1.
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Other large brownfields given preliminary consideration for development:
•
DSD property in Homburg
•
Höll property in Illingen
•
Former tar factory SARG in Saarbrücken-Malstatt
•
Becolin property and Milchhof property in Saarbrücken
5.4 Summary overview of model portfolio
5.4.1
Initial urban development policy conclusions in regard to indentified model projects
A summary overview of the projects identified in the Saarland which might be eligible for funding by
the CDF, and in particular of the identified pilot projects, clearly shows that a number of projects can
be classified under the business areas laid down for the fund. These projects represent project types
which are frequently found in the communities of the Saarland and which are characteristic examples of market failure.
There is considerable pent-up demand in the Saarland in the area of telecommunication, especially
as access to telecommunication infrastructure comes an increasingly more important factor for industrial, commercial and service companies. In particular, the rural areas of the Saarland are insufficiently serviced by high speed internet. Combined with the fact that they are hit harder by the impact
of demographic and economic structural change than the conurbation areas, this is a crucial stumbling block for initiating positive development processes in these areas. Typically, it is possible to find
a profitable enough subscriber density within the communities but the costs for connecting this large
area are so much higher that private businesses do not take action15. The activities of the Saarland
Community Development Fund now make it possible for the rural communities to take their own action in this development and thereby benefit twofold. For one, their own location factors are developed to a significant extent, making the communities more attractive to new businesses; for another,
the communities (or community-owned companies) can take the setup of the necessary telecommunication infrastructure into their own hands with the support of the CDF and profit financially from
its use.
One of the most important markets of the future in Germany and in Europe is the energy sector. Due
to rising raw material costs, more and more energy should be generated from renewable raw materials and less from fossil fuels. To the same extent, innovative solutions for the more efficient use of
15
Although the often discussed option to connect rural areas to high-speed internet via Wi-Fi is an attractive alternative
for the present time, it is assumed that the rapid increase in data volumes in the past will continue and quickly reach
the capacity of wireless LAN.
Since 12 April 2010 an auction has been running for mobile licenses for newly available frequencies; the only bidders
are the large mobile operators T-Mobile, Vodafone, E-Plus and Telefonica O2. The future use of these frequencies is
tied to the condition that “fast internet” initially be gradually extended to smaller communities on these radio frequencies. Once 90 % of them have been connected, the next larger category of communities may be approached. Environmental protection associations have already begun protesting against the planned, enormous expansion of mobile networks and the related, strong increase in electric smog effects on humans, animals and plants. In addition,
there are currently a number of complaints by companies and organisations about the auction practices of the Federal Network Agency (cf. Spiegel Online: “Netzagentur startet Milliardenpoker um Mobilfunklizenzen”, retrieved on
14 April 2010 at http://www.spiegel.de/wirtschaft/soziales/0,1518,688384,00.html).
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energy should be implemented. Communities with such efficient and sustainable energy supply systems already have a great advantage over other locations in attracting businesses and private households. Given the increasingly more limited financial flexibility of communities in the Saarland, it becomes increasingly more difficult for the public sector to pre-finance such investments. Because they
dominate the market and/or the market is too small, private power supply companies feel there is no
acute need for action. Funding by the CDF could support more involvement by municipalities and
municipal power suppliers and the public sector would then regain part of its capacity to act in this
area. Through inter-municipal collaboration and mutual participation, the sizes of projects could increase and become more efficient.
A back log of necessary renovation has been building in the inner city area of many communities of
the Saarland for many years and it is rare that the municipalities can handle it alone. Although the
classic instruments for subsidising urban development offer important funding effects in this regard,
some communities are seldom able to put up the necessary municipal contribution because of their
tightened budgets. The returns in this area are hardly enough for private investors. The image and
the business life of the location suffer from the lack of revitalisation and enforcement measures. The
assistance of the new funding possibilities through the CDF makes it easier for the municipalities to
carry out the necessary urban development measures and, at the same time, requires that sustainable, cash flow-generating solutions be found. This is the way to reach a multitude of communities
and prompt them to tackle their urban development problems more intensively.
Strengthening local business is another interest for the involvement of the CDF. As the identified projects demonstrate, the communities of the Saarland are hardly able to carry out the measures
needed to improve the conditions for local business on their own. With its revolving financial engineering instruments, the CDF can help make the measures needed for municipalities to make themselves more attractive locations for business financeable in spite of tight budgets and also stimulate
activities in the private sector to ensure the communities function as centres.
Though none of the pilot projects selected fall under the classic brownfield development category
(because none of the concepts listed in the product pipeline were developed enough to be assessed
during the period in which the evaluation study was prepared), the number of projects currently under discussion and the fact that they are not only local but also significant across the state shows the
relevance of this business area for the activities of the CDF. The most frequent project types of this
category to occur in the Saarland are the many small buildings and plots of land gone fallow in individual (usually rural) communities for one, and the sustainable development of larger industrial
brownfields for another. The concept of an urban redevelopment and structural development company was developed to solve the first problem; with the incentive of getting funding, it should pool
together and develop brownfields and other, value-generating real estate in a single portfolio. The
use of subsidies is definitely necessary to develop large brownfields into order to reduce the investment costs and even make economical development possible in the first place. With the aid of CDF
instruments, the public sector can also then directly participate in these developments, i.e. stipulate
development goals and promote their achievement, and at the same time benefit from their financial
success. This justifies the subsidies granted in advance to a large degree.
It becomes clear that the activities of the CDF can support the central business areas of urban and
community development. Even though the projects themselves do not shine in the financial analysis,
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compared to the situation to date, the urban development policy benefits from the implementation
of these projects are that much greater.
5.4.2
Initial financial conclusions in regard to the five pilot projects
For the five pilot projects of the community development fund, the relevant capital expenditure and
revolving cash flows over each project’s individual duration were laid out in the previous chapters.
Based on these cash flows, the yield for each project was calculated in the form of the internal rate
of return or IRR. The resulting project yields came out between 4.69% in the best case (Fibre Optic
flagship project in Dillingen) and 2.13% in the worse case (Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler). It is clear that, given the inherent risks, private project developers would not be
willing to implement the projects in this portfolio at these low yields. Not one of these projects
would be considered a commercial, freely financeable A-list project.
As explained at the start, the project yields also demonstrate the average annual return on capital
employed in the project – and this is independent of how the project is financed. Thus, these yields
do not include any financing costs, which also have to be covered from the calculated returns. Assuming normal project financing from commercial credit institutes, the financing cost calculation for
each project would be composed of four components:
1. the refinancing costs of the bank,
2. the administrative costs for the credit check and for issuing and controlling the loan,
3. the standard risk costs, based on the average default rates in the project development business in the past, and finally
4. the cost of equity (COE) of the loan based on the capital adequacy regulations for the project
business laid out in Basel II.
Project development is one of the riskiest business areas for a bank. This is directly reflected in the
financing costs for project initiators, which are nearly in the double digits. This, in turn, is a result of
the fact that the administrative costs tend to be very high because reviewing the business plan of the
project ex-ante is extremely time consuming. There are also high standard risk costs because the project business has higher default rates than other business areas. Finally, Basel II stipulates higher
capital adequacy rates for project development loans than for all other business areas of a bank.
Thus, it is clear that none of the five pilot projects would hold up to a project financing review by
commercial banks, because it would be loss-making for the banks. This statement may not hold true,
however, if the project financier and borrower are not private investors, but rather public institutions, e.g. a municipality. Since loan default is, by definition, not possible for a municipality, only the
refinancing costs and administrative costs for the loan have to be covered by the bank margins; there
is no fee for standard risk costs or COE. Therefore, municipalities can borrow at much cheaper conditions than private investors. This difference will also be considered in the further conception of the
CDF. At the same time, however, municipalities themselves are prohibited from getting funding via
equity investment; this instrument can only be used in conjunction with municipal companies or land
acquisition.
One initial conclusion regarding the five pilot projects is that they fit squarely within the designation
of a so called B-list project for a UDF (or, in this case, a CDF). After financing costs, profit-generating
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A-list projects require no financing help while, due to the complete lack of cash flows, it is only sensible to implement C-list projects through subsidies. It is the remaining B-list projects, with slightly
positive project yields which would still be loss-making under the conditions for commercial financing, which are suitable for the fund model. Now that all five pilot projects appear to feature the typical characters of that type, the fund model can be developed as soon as the legal framework for the
projects has been clarified.
5.4.3
Legal analysis of the pilot projects
A legal analysis of the proposed projects had to take into account that they are still in the planning
stages and it is not yet clear in which form the CDF will invest. Therefore it is not possible to do a legally binding analysis at this point in time. Hence, individual legal points will now be examined. It
should also be noted that the relevant legal conditions in general and in detail are shown in Chapter
3. Special attention has been paid to the guidelines of the Structural Funds regulations, public procurement law and state aid law.
From the perspective of the CDF, it is critical that the decision to invest in individual projects be
transparent and proper. Understanding the reasons behind these decisions can be relevant for various legal issues. It is especially relevant to first interpret the state aid legislative concepts of “fair
market conditions” and “investors in a free market”. Under budget law, it is also necessary to properly assess the suitability of a project in terms of its investment needs.
In terms of the guidelines of the Structural Funds regulations regarding the eligibility for funding as
such, the primary source is Article 5 of Regulation (EC) No 1080/2006, since the Saarland falls under
the funding focus on “Regional Competitiveness and Employment”. Furthermore, the Operational
Programme ‘Saarland’ opens up the possibility of investment in “Sustainable Urban Development”
according to Article 8 of Regulation (EC) No 1080/2006. The passages in the Operational Programme
‘Saarland’ which establish the priority axes “Promoting competitiveness through growth and entrepreneurial measures to reinforce the enterprise base” (1); “Stimulating structural change through
knowledge-based business, innovation and development of specific strengths” (2) and “Sustainable
urban and regional development and resources protection” (3) are critical to determining the eligibility of individual projects.
Finally, it must be considered that the individual budget situation of each of the municipalities and
communities affected can have an influence on the analysis of the legal situation (indebtedness,
budget constraints etc.). In this regard, a legal analysis must be done individually and look specifically
at the point of time the investment is to be made.
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Prof. Nadler &
CONSTRUCTING A FINANCIAL MODEL FOR THE SAARLAND COMMUNITY DEVELOPMENT FUND
The starting point for further analysis is the project portfolio, with its cash flows and yields, as calculated in the previous chapter. The necessary maximum capital requirements of the CDF can be derived from these figures. After that, the forecast project financing to come from the CDF for individual plans is included and finally the refinancing of the fund, together with the costs of the entire
fund, are incorporated into the fund architecture.
6.1 Capital requirement analysis at the fund level
To calculate the capital requirements of the CDF, it first has to be determined whether the five presented pilot projects will require full financing by the fund or whether complementary sources of financing mean that one or more projects only require partial financing.
Although it would be possible to fully finance all five pilot projects in principle, since the required financing volume would be EUR 8.55 million and thus less than the planned fund volume, the following
assumes that two projects, Ottweiler and Lebach, will only need partial financing. This partial financing was either expressed implicitly as a wish of the project actors for potential fund financing (in the
case of Ottweiler) or explicitly named as one of two alternatives (for Lebach). Since it is possible in
both projects to cover the remaining financing with urban development subsidies and, in the case of
Ottweiler, also with a contribution from the city, subsidisation can be combined with revolving financing from the CDF in each case. The partial financing has an advantage for the CDF because the
minor project cash flows can be gained with less capital employed, as no cash flows are estimated for
the remaining subsidisation.
In concrete terms, this means that, for the Ottweiler project, assuming total financing needs of
EUR 1.6 million, 61% is covered by urban development subsidies (EUR 645,000) and by contributions
from the city (EUR 330,000), while the remaining 39% (EUR 625,000) is financed by the CDF. In the
Lebach project, the CDF finances 68% (EUR 980,000) of the total investment amount of EUR 1.44 million, with the rest coming from urban development subsidies.
Under the assumption that these two projects are partially financed, the cumulative capital requirement to cover the capital expenditure for the five pilot projects amounts to nearly EUR 7.113 million
(see Figure 40).
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87
0
2010
-500.000
2011
2012
2013
-1.000.000
-1.500.000
-2.000.000
-2.500.000
-3.000.000
-3.500.000
-4.000.000
Figure 40 – Gross capital requirements of the CDF for the five pilot projects (in euro)
These capital requirements are focussed on the years 2010 and 2011; only the Ottweiler project,
which has an estimated construction period of three years, shows a minor capital requirement in
2012 of EUR 208,333 (see Figure 41).
2010
Cash flows
- Dillingen
- Ottweiler
- Nalbach
- Neunkirchen
- Lebach
Total-Cash flow
2011
-540.000
4.800
-208.333 -208.333
-334.000 -334.000
-2.150.000 -2.150.000
-490.000 -490.000
-3.722.333 -3.177.533
2012
2013
2014
2015
9.600
-208.333
41.100
374.400
80.000
296.767
14.400
440.000
41.100
374.400
80.000
949.900
19.200
15.000
41.100
374.400
80.000
529.700
24.000
15.000
41.100
374.400
80.000
534.500
…
2032
62.400
0
41.100
0
0
103.500
Figure 41 – Total cash flows from CDF for the five pilot projects (in euro)
As was seen in the look at the concrete project cash flows, the project in Dillingen already delivers
minor returns in 2011, while the cash flows in 2012 are already higher than the capital requirements.
From 2013 on, the total cash flows of the CDF are consistently positive until the end of the planned
duration of the fund in 2032. The high cash flows in 2013 are the result of the high, one-time sales
proceeds for the project in Ottweiler.
Furthermore, it is clear that the cumulative gross capital requirements of the CDF, i.e. not including
cash flows which have returned to the fund in the interim, are EUR 7.113 million and that more than
half of this amount (EUR 4.3 million) is estimated for a single project, the construction of a hotel on
the Spitzbunker property in Neunkirchen, so that this project represents a financing heavyweight.
The other four projects all show much lower capital requirements between EUR 0.98 million (Lebach)
as the second largest project and EUR 0.54 million (Dillingen) as the smallest. The calculated total
cash flows result in a portfolio yield of 3.59% in the form of an IRR for the cash flows; though note
that this is before the financing and administrative costs of the fund.
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4.000.000
2.000.000
-2.000.000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
0
-4.000.000
-6.000.000
-8.000.000
Figure 42 – Cumulative net capital requirements at the fund level (in euro)
(Investment and)
subsidy projects
Financing
Management
costs
Gearing
costs
Available
cash flow
NPV /
Final Value
CDF income
(Investment and)
loan projects
Required
investments
Loan
volumes
(Equity) capital
contribution
Equity from municipalities
Equity from third parties (at project level)
Funding (e.g. ERDF)
Public/private co-financing
Figure 43 – The fund structure
Now analysing the net capital requirements of the CDF by cumulating each of the reported cash
flows per period, it becomes clear that the financing amount paid out by the fund to the five pilot
projects would be repaid from project cash flows alone by 2023 (see Figure 42). This would not be
possible, however, if one includes the financing costs and administrative or management costs for
the fund in the equation. These cost components will raise the capital requirement considerably,
since interest-bearing capital should also be invested in the CDF. Thus, it is not just the management
costs, but the refinancing costs for business activities which have to be integrated into the fund calculation. Therefore, as was the case for project financing, the final capital requirement can only be
determined when all three design parameters are considered, as in the approach shown in Figure 43.
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In evaluating the projects, one advantageous criterion for handling investment accounting, including
financing, can be exploited. In contrast to the traditional project financing approach, the following
calculation does not apply the net present value but rather the final asset values based on the complete finance plans. This recursive configuration of the final asset value realistically integrates the
imperfect capital market with its separate interest rates for debits and credits, which means that the
financing of shortfalls and the reinvestment of profits do not have to be calculated using the regular
consistent rates of return which are typical for net present value.
V0 = E 0 − A0
Vt = Vt −1 + E t + ZE t − At − ZAt
für
t = 1,..., n
mit
ZAt = s ⋅ St −1
ZE t = h ⋅ H t −1
St = St −1 + K t − Tt
To calculate the asset value Vt (t = 0, 1, …, n) the fund revenues (Et) are extrapolated yearly in a finance plan and added to the current expenses (At) for management, tax, and project funding costs,
as well as the interest income (ZEt) and the interest expenses (ZAt). It is necessary to examine for
each year whether the fund turned a profit and was thus able to reinvest newly available (CDF)
money (Ht) at investment or credit interest rates (h) which would result in interest income in the following years. If it is unable to cover expenses, however, it would be necessary to raise capital (Kt),
which would result in additional interest expenses and repayments (Tt) in the following years to refinance the business activities.
6.2 Fund accounting premises
The main assumptions for fund accounting, which have already been agreed upon with the future
fund managers, will be clarified in the following (see Figure 44).
The fund is assumed to begin operations at the end of 2010. The duration of the fund will be tied to
the duration of the projects. These vary from 16 years for the Lebach project (ending in 2026),
17 years for the Neunkirchen project (ending in 2027), 20 years for Ottweiler (ending in 2030) and
22 years for Dillingen and Nalbach (ending in 2032). It should be noted here that the Dillingen project
is actually planned to last until 2040, but this would be a very long planning period for the CDF. It was
thus proposed that the Dillingen project also runs until 2032 at which point the debt should be transferred to another lender.
Because of the overall, very long project durations, it is assumed in the following that the CDF will
have a duration of 22 years (until the end of 2032). Should the point in time at which the fund goes
into operation be delayed by one year due to organisational preparatory work or political decision
(to the end of 2011), this would not have any initial impact on the value of the fund under the premise that the projects do not change. Rather, the fund would (only) continue activity until the end of
2033 instead.
In terms of fund management a number of different interpretations of the laws which stipulate the
remuneration for management services came up during the compilation of this study. According to
Article 43 of Regulation (EC) No 1826/2006, if there is no tender procedure, then a cap of 3% of the
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capital contribution of the Operational Programme to the financial engineering instrument (here, the
CDF) is set for management costs. Since the fund manager was planned to be a public sector body,
no mention has been made of tax payments in the following fund accounting. Since the governance
model would proscribe conducting a tender procedure for the review of the eligibility of project proposals to the CDF for financing and loans, the 3% threshold may be exceeded. Additional costs incurred would then be covered by the state budget. However, the following assumes that the SIKB will
be responsible for the financing and loan eligibility review. Insofar, the following fund account reflects 3% of the capital contribution from the Operational Programme in the CDF as administrative
and management costs.
Duration of fund activity: 22/23 years (2010-2032; note: longest project 22 years)
Administrative and management costs: maximum 3 % of capital contribution of Operational Programme to the financial engineering instrument possible
Fund volume: EUR 30 million,
Thereof ERDF funds:
EUR 10 m (33.33 % grant)
Co-financing from state budget:
EUR 10 m (33.33 % grant)
CEB loan:
EUR 10 m (33.33 % interest-bearing loan)
Conditions of CEB loan:
Interest at the 3-month EURIBOR (currently 0.65 %) + 35 basis points
Term 10 years, thereof the first five years interest-free, then paid off by annuity
Interim financing costs: 5 % p.a. (if required) for any short-term peak needs
Reinvestment interest income (unused funds remaining): 2.0 % p.a.
Scope of project financing:
Granting dormant partner’s interests (perhaps also loans and equity at a later time);
Repayment by annuity with durations similar to projects of up to 22 years;
Extension for repayment possible at the beginning (development and construction phases);
Interest rate: 2.0 % p.a. plus participation in profit or loss at end of project;
Typical dormant partner’s interest without active project management by the fund;
All five identified project types;
Full and partial financing of projects;
Number of cycles (until funds are returned): each project type 4-5 times
Figure 44 – Premises for fund accounting
Within the working group, it was decided to set the fund volume at EUR 30 million during the initial
phase. In contrast to other UDFs already in planning (see the concepts on UDFs e.g. in Hamburg,
North Rhine-Westphalia, Berlin and Brandenburg), which all foresee the maximum amount of cofinance for ERDF funds from the Operational Programmes provided to the UDF, another refinancing
method was chosen for the CDF in the Saarland. In addition to the starting deposit of EUR 10 million
the ERDF puts into the CDF at no interest, another EUR 10 million will be deposited by the Saarland
as state co-financing. Moreover, the CEB will lend the CDF a further EUR 10 million, bringing the total
fund capital to EUR 30 million split evenly among the three sources of financing.
In terms of interest, it is assumed in the following that two thirds of the fund capital, the parts contributed by the ERDF and the state co-financing, are non-interesting-bearing and provided as grants
and that this capital does not have to be paid back. In regard to interest on the state co-financing,
there is a difference between the Saarland Community Development Fund and other UDF concepts
being developed in Germany at present. In most models, the state co-financing is provided by a development bank (e.g. the NRW.BANK in North Rhine-Westphalia or the IBB in Brandenburg). Although some of these waive interest on the capital during the start-up phase, the co-financing should
not generally be understood to be non-interest-bearing as is the case in the Saarland. Thus, the CDF
has a cost advantage as there is no need to pay refinancing costs on this EUR 10 million of the fund
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capital. The last third of the fund capital, provided by the CDF, does bear refinancing costs. These are
very low, however, and based on the 3-month EURIBOR rate plus a premium of 35 basis points. Since
the 3-month EURIBOR stood at 0.65% as at 17 March 2010, for example, at this point in time the refinancing costs for the fund would be (0.65% + 0.35% =) 1% p.a. Nonetheless, these refinancing conditions could fluctuate to a limited extent with changes in the EURIBOR. Since this depends on the future development of interest rates, the rate is assumed in the following to be 1% p.a. for the EUR 10
million CEB loan to the fund. The repayment schedule for the CEB loan is set up as a ten-year term
with a five-year grace period. The principle is then repaid over the remaining five years of the term,
with the first repayment due at the end of the sixth year.
If, within the scope of the CDF’s activities, there is a short-term need for more capital than the
EUR 30 million starting deposit, these are assumed to be interim financed at a current market interest rate of approx. 5.0% p.a. Given the high CDF volume compared to the capital requirements of the
pilot projects in the start-up phase, this is quite unlikely; nonetheless, this also serves as the assumption for the individual projects if, due to limitation to partial financing, the remaining financing has to
be found on the market. If the CDF has unused capital, it will be reinvested at 2.0%. These assumptions represent a conservative starting situation which could still vary due to the further potential for
optimising the fund. This might come, for example, when the fund management reinvests the unused
capital in new projects (which are not yet determined). In this case, even when the fund charges a
low interest rate for the loan, it will generate higher interest income from the reinvestment. More
details are found on additional optimisation potential at the end of the chapter.
In regard to the financial engineering instruments which the CDF gives to the projects, it is initially
only foreseen to grant dormant partner’s interests. Once cash flows return to the fund at the end of
the pilot projects, however, it is possible that the CDF could expand its range of financial engineering
instruments to include equity and loans. This depends on the governance model chosen. Due to the
generally higher risk-reward potential of equity capital investments, for example, it would be advantageous for the CDF to be its own legal entity in this case. The advantage of equity capital investments over lending are seen when projects offer the possibility of strong profits, which are (far)
higher than the agreed upon credit interest rate. In the case of loan financing, these profits go to equity investors outside the fund, whereas the fund would participate in the cash flows if it has financed through equity capital. Insofar, the preferred option is for the CDF to invest through dormant
partner’s interests. Lending, as well as equity, is not ruled out for the CDF, at least for the “second
round” of financing integrated urban and community development projects.
The durations of the pilot projects in the starting portfolio show, however, that a second round of financing would come at a quite late stage. All of the five pilot projects are longer running projects
with durations of at least 16 years and the longest project – as explained above – is actually even 40
years. The long financing periods are absolutely necessary for each project, since shortening them
would mean that the annual payments, composed of interest and the repayment of principle, would
be too high to pay from the project cash flows. In the area of dormant partner’s interests, durations
of more than five years in connection with predetermined principle repayment plans are customary.
In order to grant the individual projects the most favourable possible repayment conditions for their
credits, but also cover all costs for the CDF’s business activities, a low, steady repayment (annuity) of
the capital over up to 22 years was seen as practical. Funding with an unclearly defined amortisation
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schedule, e.g. in which the repayment is determined variably according to the cash flows in each period, is not allowed. Such funding conditions would have a large disadvantage for the CDF, as the returns to the fund could not be planned, but would directly depend on the project cash flows. The financing of new projects might then be at risk or not occur according to plan.
This does not exclude the agreement on a grace period, since most of the projects generate very
small cash flows in the early years. It is “indirectly” necessary to defer payment in projects which are
unable to repay in the first years of the construction stage and instead increase outstanding debt by
raising additional capital.
In terms of financing rates, the aim is to set the lowest possible rate in order to further reduce the
encumbrance on the project and achieve the stated public goals. This depends on the selected refinancing structure of the fund and is also determined based on the impact on the pilot projects. If the
current interest rates for municipal loans are used for orientation, such as they are granted by the
KfW bank (some below 2.0%), a rate of 2.0% currently seems realistic. Given the project returns calculated in the previous chapter, it is also essential to grant favourable financing conditions with long
durations. Since all five pilot projects are long-running and show low project returns well below 5%
across the board, higher financing costs and/or higher repayments would be a disadvantage for these
projects and put the cash flows to the fund at risk. Therefore, an interest rate of 2% p.a. is used
throughout the rest of the evaluation of the feasibility of the fund. During the implementation stage,
the fund management shall decide whether higher or, if necessary, even lower credit interest rates
can be granted depending on the current project risks and refinancing costs.
It should also be noted that, in addition to the fixed, minimum interest rates, dormant partner’s interests also require that the CDF participate in the profits or losses of the projects. This participation
occurs at the end of the project’s duration and can mean additional income for the fund (in the project is profitable) or the acceptance of default costs for the fund (if it is not). The amount of the default costs cannot be limited in advance. They are the total of the still outstanding participation
amounts at the end of the project. Looking at the amount of the profit participation, guidelines regarding appropriate yields for dormant partner’s interests have been developed in the German legal
system over the last few years. They fall between 15% and 35%. Although this rate shall be negotiated by the future fund managers on an individual basis, it will be assumed from this point on to be
the minimum participation of 15% in the profits of the projects as each comes to the end of its duration. In terms of fund capital preservation, this is a conservative premise which still positively supports the ability of projects to be financed.
At the same time, it has to be noted at this point that the project types and their financing volumes
only mean total capital requirements of approx. EUR 7.113 million for the CDF. This was already
clearly shown in the capital requirements analysis at the fund level in the previous chapter. Therefore, far more projects of the same type could be supported by the Saarland Community Development Fund. Assuming that capital is distributed evenly to all five project types at the corresponding
financing rates according to Figure 45, then all model projects could be carried out 4-5 times, which
means more than 20 individual projects could be financed within the foreseen duration of the CDF.
The members of the working group estimated that, if a call for projects was done across the Saarland, this would realistically represent the demand for projects and financing. Refer to the comprehensive analysis in Chapter 2.3 for more information.
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93
Project
Type of fi- Financing rate
nancing
Financing conditions
Notes
Dillingen
Dormant
partner’s interest
100%
(= € 540,000)
22 years; even repayment of principal after
6-year grace period
Transfer debt to other
creditor at end of fund
duration (= repayment
to fund)
Ottweiler
Dormant
39%
(= € 625,000)
2-year grace period
Partial financing, combined with urban development subsidies and
city’s own contribution
Nalbach
Dormant
100%
(= € 668,000)
1-year grace period
Potential setup of a PPP
model
Neunkirchen
Dormant
100%
(= € 4.3 m)
1-year grace period
Partial financing: private
investors finance the
rest (€ 1 m) for land and
ancillary building costs
Lebach
Dormant
68%
(= € 980,000)
1-year grace period
Partial financing, combined with urban development subsidies
Figure 45 – Potential fund financing for pilot projects
6.3 Results of fund calculations
Based now on the 4-5 cycles for the five project types, using these to derive the cash flows of the
portfolio, and handling the fund calculations in accordance with the premises set in the previous
chapter, the result is the following finance plan for the CDF (see Figure 46).
+ fund revenues
+ interest income
- fund expenses
- interest expenses
fund cash flow
2010 Dec
-16.127.665
-16.127.665
2011
-13.403.665
277.447
-483.830
-100.000
-13.710.048
2012
902.121
3.246
-895.616
-100.000
-90.250
…
…
2030
755.834
364.355
-26.628
0
1.093.561
2031
158.644
386.227
-9.240
0
535.630
2032
180.906
396.939
-4.666
0
573.180
Figure 46 – Finance plan for the Saarland Community Development Fund, Part 1 (in euro)
One notes that the fund cash flow looks like a typical investment. Expenses dominate income in the
first two years. From the third year until the possible end of the fund (and all projects), there are only
cash flows to the fund in the form of profits. The greatest gap between income (none) and expenses
(high) happens in the first year. At the end of the fund’s duration, the cash flows shrink drastically in
those years when individual projects have completely repaid, e.g. after 2026 and 2031. Since the
fund calculations do not include any reinvestment of the newly available capital into projects, in the
sense of a second round of financing, the income drops at the end of the fund duration. Adding in the
refinancing, default and management costs, the cash flows to the CDF over its entire duration look as
follows (see Figure 47).
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5.000.000
-5.000.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011 Jan
0
-10.000.000
-15.000.000
-20.000.000
Figure 47 – CDF cash flows over the entire duration of business activity
(including refinancing, default and management costs; in euro)
Following the path of the related fund capital, i.e. the sum of the capital paid out, it becomes clear
that the CDF will have actually used nearly exactly its entire starting capital of EUR 30 million to finance the pilot projects. The capital will have already been completely employed by 2015. Furthermore, the complete amount of capital employed is repaid by the end of 2031 and thus shortly before
the end of the fund duration (see Figure 48).
35.000.000
30.000.000
25.000.000
20.000.000
15.000.000
10.000.000
5.000.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011 Jan
0
Figure 48 – Development of CDF capital (long-term funding in euro)
The following examines the impact of the granted fund financing on both the project level and the
fund level in terms of the goal of capital preservation. It should be noted that the proposed fund
model does not aim to be a single, specified nominal value, but rather an iterative solution. This
gradually brings the fund architecture closer to the needs of the Saarland, as an analysis of the impact of the fund financing on the pilot projects clearly shows.
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6.4 Evaluation of fund financing in regard to pursuing public sector goals at the
project level
6.4.1
Fibre Optic flagship project in Dillingen
The Saarland Community Development Fund will provide the full capital expenditure of EUR 540,000
needed to finance the Fibre Optic flagship project in Dillingen. The financial engineering instrument
granted to the project will be a dormant partner’s interest with a 20-year repayment schedule at a
2.0% fixed interest rate. KomCon proposed an eight-year grace period, wherein no repayment needs
be made. Analysing the cash flows of the project in detail, it becomes clear that the returns from the
project through 2012 are not enough to afford the interest payment to the CDF, to say nothing of the
repayments. The amount of the participation rises to a minor extent until 2013 due to the deferment
of payment; starting in the seventh year, an annual capital service of EUR 45,210 will be paid to the
fund until the end of the duration. Therefore, the a grace period of six years is granted for the participation. Figure 49 shows that the financing can then be completely repaid to the CDF within 20
years.
600.000
500.000
400.000
300.000
200.000
100.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011 Jan
0
Figure 49 – Participation in the Dillingen project (in euro)
At the same time, a comparison of the project cash flows and the necessary capital service to the CDF
shows that the capital service cannot be financed by annual cash flows alone until 2020. In the prior
years, i.e. between 2016 and 2020, at a debt service coverage (the ratio between cash flows and
capital service) under 100%, this is only possible if the project cash flows from the years 2013 to
2016, when the grace period was still in force, can be temporarily reinvested and then used to pay
down the principle. Not until 2023, when the project has the revenues from connecting all 65 units to
the fibre optic network, does the debt service coverage rise to 138% and stay at this level until the
participation of the CDF is over (see Figure 50).
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160,00%
140,00%
120,00%
100,00%
80,00%
60,00%
40,00%
20,00%
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
11
Ja
n
0,00%
Figure 50 – Debt service coverage in the Dillingen project
One risk factor is a change in the price for telecommunication services. As already discussed in the
project chapter, it is not feasible to expect a price increase to raise sales. Rather, the price for these
services has fallen on average by 2.84% p.a. over the last few years. Although the future need not follow the trends of the past, a price increase would significantly reduce the telecommunication coverage. Another factor of uncertainty in the project in Dillingen which might cause a change in cash
flows is the actual number of potential businesses to be connected to the fibre optic network. This
figure was forecast at 15 but it might come out lower (or in the best case, higher). Since the debt service coverage for the years 2016 to 2019 is below 100%, a lower number of subscribers might initially
mean that the capital service cannot be fully repaid to the CDF. If the full number of 65 subscribers is
reached in the long term and there is no further price erosion on the market for telecommunication
services, however, the CDF financing for the Dillingen project would financially feasible under the
given premises in any case.
At the end of the duration, under the premises given, the project generates a minor profit, in which
the CDF’s participation entitles it to 15%. This means additional income of approx. EUR 30,000.
6.4.2
Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler
The Saarland Community Development Fund will provide EUR 625,000 of the full EUR 1.6 million
needed to finance the Terentiushof/Wilhelm-Heinrich-Straße project in Ottweiler. Like for the
Dillingen project, the financial engineering instrument granted to this project will be a dormant partner’s interest with a 20-year repayment schedule, though here the grace period is only two years.
Since the remaining financing need will come from urban development subsidies, supplemented by a
contribution from the city, all the project cash flows can be used to repay the CDF, which means the
funding will be completely repaid in 2030 (see Figure 51).
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700000
600000
500000
400000
300000
200000
100000
20
30
20
29
20
28
20
27
20
26
20
25
20
24
20
23
20
22
20
21
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
11
Ja
n
0
Figure 51 – Participation in Ottweiler project (in euro)
In terms of its cash flow structure, the Ottweiler project shows the peculiar feature that these cash
flows will come from two sources, EUR 15,000 from regular rental income from the parking spaces
created on Wilhelm-Heinrich-Straße for one, and the one-time sales revenues of EUR 440,000 for
selling the land along the Federal Highway 41 plus the sale of the real estate in Wilhelm-HeinrichStraße 31 to 35. Assuming now that the sales revenues are generated in the year directly after completion and can thus be brought in in 2013, these one-time cash flows would ensure that a debt service of EUR 42,528 p.a. could be afforded from 2013 to 2030. Without these one-time cash flows,
however, the annual rental income of EUR 15,000 would not be nearly enough to cover the debt service. Thus, the following debt service coverage calculations incorporate these sales revenues, which
are reinvested in the interim and then continuously used to pay back the debt service each year
(see Figure 52). Leaving out these sales revenues would have meant an insufficient debt service coverage of (€ 15,000/€ 42,528 =) 35%.
Insofar, it again becomes clear at this point that the ability of the project to repay the CDF is directly
determined by the point in time when the land along Federal Highway 41 and the buildings at
Wilhelm-Heinrich-Straße 31 to 35 are sold. If they cannot be sold in 2013, the annual cash flows of
EUR 15,000 from renting the parking spaces is just enough to pay the interest of EUR 12,752 (2% on
the accrued debt) to the CDF and, in theory, to make a minimal amount of repayment. Thus, the project yield worsens when the sales revenues are delayed.
the CDF’s participation entitles it to 15%. This means additional income of approx. EUR 750.
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2500,00%
2000,00%
1500,00%
1000,00%
500,00%
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011 Jan
0,00%
Figure 52 – Debt service coverage in Ottweiler project including reinvested amounts from one-time sales proceeds
6.4.3
Local Heating Supply project for the community of Nalbach
The Saarland Community Development Fund will provide the full EUR 668,000 needed to finance the
construction of a local heating supply plant in Nalbach. Once again, the financial engineering instrument granted to the project will be a dormant partner’s interest at a 2.0% fixed interest rate, but in
contrast to the previous projects, this one will have a 22-year duration. Due to the very even cash
flows from the project with exactly the same revenues from the year it goes into operation (2012), it
will only be necessary to defer repayment during the construction stage, i.e. there is a one-year grace
period. As shown in Figure 53, the project is able to repay the full amount of the financing to the CDF
by the end of the fund duration in 2032.
800.000
700.000
600.000
500.000
400.000
300.000
200.000
100.000
32
20
30
31
20
20
29
20
28
20
27
20
26
20
25
20
24
20
23
20
22
20
20
19
18
17
16
21
20
20
20
20
20
20
15
20
14
20
13
20
n
12
20
20
Ja
20
11
11
0
Figure 53 – Participation in Nalbach project (in euro)
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In calculating the debt service coverage, however, it becomes clear that, at a steady 103.63%, it is
only barely possible to repay the debt service to the fund from the project cash flows. If the cash
flows come out even a little lower, however, the debt cannot be completely serviced (see Figure 54).
120,00%
100,00%
80,00%
60,00%
40,00%
20,00%
20
30
20
29
20
28
20
27
20
26
20
25
20
24
20
23
20
22
20
21
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
11
Ja
n
0,00%
Figure 54 – Debt service coverage in Nalbach project
In terms of the risk-reward potential of the Nalbach project, however, it should be pointed out that
the underlying cash flows are based on very conservative assumptions, both in regard to the value of
the revenues and the volumes. The energy price is assumed to remain constant over the entire duration of the credit. In contrast, assuming a moderate to high increase in energy prices would mean
that the income from the energy savings comes out considerably higher. Assuming the price of energy increases at the average rate over the last ten years, or 2.07% p.a., the income would increase
by 50% from the start of the fund duration to the end. As far as the volumes go, there is also potential for increase here if the additional connection to 100 households in the second construction stage
is included. In comparison to the previous projects, the Nalbach project offers more opportunities
than risks, and these could increase the cash flows and thus the project yield. In other words, in spite
of the tight debt service coverage, it can be assumed that this project can be financed by the CDF.
6.4.4
Spitzbunker City Hotel in Neunkirchen
The goal is for the Saarland Community Development Fund to provide the EUR 4.3 million needed to
finance the construction of the hotel in Neunkirchen, while private investors contribute another million to finance the land acquisition and ancillary construction costs. Once again, the financial engineering instrument granted to the project will be a dormant partner’s interest at a 2.0% fixed interest rate, but this time with duration of 15 years (see Figure 55).
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5.000.000
4.500.000
4.000.000
3.500.000
3.000.000
2.500.000
2.000.000
1.500.000
1.000.000
500.000
5
4
6
20
2
20
2
3
20
2
20
2
2
1
20
2
0
20
2
9
20
2
7
6
8
20
1
20
1
20
1
20
1
5
20
1
4
20
1
3
20
1
2
20
1
1
20
1
20
11
Ja
n
0
Figure 55 – Participation in Neunkirchen project (in euro)
Totalling the forecast revenues from the operation of the hotel and the gastronomy less the planned
expenses, and assuming 65% capacity utilisation of the hotel over half of the year, results in net
revenues of EUR 374,400 p.a. This is enough to cover the steady debt service of EUR 337,996 p.a. to
the CDF (see Figure 56).
112,00%
110,00%
108,00%
106,00%
104,00%
102,00%
100,00%
2011
Jan
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Figure 56 – Debt service coverage in Neunkirchen project
In this project, it must be noted that private investors have put up EUR 1 million, which also has to
generate returns. As recipients of residual income, however, the investors (only) get the amount
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101
available after the creditors have been paid their due from the project. In this case, it amounts to
(€ 374,400 – € 337,996 =) € 36,404 p.a. This equals a return on equity (ROE) of 3.64%. Though this
yield is very low relative to the high risk of the investment, it does not reflect that the investors also
acquire ownership of the building and thus any revenues from its sale go to them as well. In the
event of disposal at 10 times net income (EUR 3.74 million), this already means a yield of 11.4% p.a.
for the investors. This should already been seen as sufficient for this segment of the German real estate market. This changes little for the participation of the CDF, since the yield only falls from 11.4%
to 11.2%. This means additional income of approx. EUR 95.000 for the fund.
Given the presumed partial financing of the Ottweiler and Lebach projects, the significance of financing the Neunkirchen project is even more than if it was fully financed. Of the total € 7.113 million
paid out by the CDF, 60.45% of the financing volumes goes to this hotel project. This creates a cluster
risk for the CDF, that is, insufficient risk diversification. This is expressed in the fact that the cash
flows to the CDF depend on the capacity utilisation of the hotel in Neunkirchen to a disproportionately high degree.
6.4.5
Revitalisation of the pedestrian precinct in Lebach
For reasons of risk, the Saarland Community Development Fund will provide only 68% of the full capital expenditure needed in the last project in the starting portfolio to finance the revitalisation of the
pedestrian zone in Lebach. Once again, the financial engineering instrument granted to the project
will be a dormant partner’s interest at a 2.0% fixed interest rate, but this time with duration of 16
years and a one-year grace period. As visible in Figure 57, the full sum of the financing will be paid
back by 2026.
1.200.000
1.000.000
800.000
600.000
400.000
200.000
20
26
20
25
20
24
20
23
20
22
20
21
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
11
Ja
n
0
Figure 57 – Participation in Lebach project (in euro)
The fact that the remaining capital is to come from urban development subsidies is advantageous for
the CDF, because the EUR 80,000 saved annually from the repair work is available for cash flows to
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the CDF alone and so the credit volume is lower. This means steady debt service coverage of 103.85%
(see Figure 58).
104,50%
104,00%
103,50%
103,00%
102,50%
102,00%
101,50%
101,00%
100,50%
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
11
Ja
n
100,00%
Figure 58 – Debt service coverage in Lebach project
In terms of the cash flows, it is questionable whether revitalising the pedestrian precinct in fact only
means savings compared to the status quo, or whether additional costs will have to be deducted
each year to care for the green spaces and maintain the parking spaces.
6.5 Evaluation of the business activity at the fund level
Based on the five pilot projects, the business plan (see Figure 59) of the Saarland Community Development fund reveals the risks as well as the additional chances for optimising this innovative financial engineering instrument for urban planning.
Remaining capital available
Capital raised by ERDF/state
Debt
Capital raised by CEB
Debt
Capital repayment
Capital raised for interim financing
Debt
Capital repayment
2011 Jan
13.872.335
20.000.000
20.000.000
10.000.000
10.000.000
0
2011
162.287
2012
72.037
…
…
2030
19.311.335
2031
19.846.965
2032
20.420.145
20.000.000
20.000.000
…
20.000.000
20.000.000
20.000.000
10.000.000
10.000.000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Figure 59 – Finance plan for the Saarland Community Development Fund, Part 2 (in euro)
Continuing the financial planning from Chapter 6.1 shows that, after completion of the projected 22
years in total, the fund will have additional assets of a good EUR 0.42 million (see Figure 60). This
amount at the end of the duration should be understood as fund profits. In regard to the three
sources of financing to the CDF, this means:
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103
1. the loan from the CEB for EUR 10 million at an interest rate of 1% and a duration of 10 years,
with a five-year grace period will have been paid back completely in 2020 according to plan,
2. the state co-financing of EUR 10 million will have been preserved, and
3. the EUR 10 million from the ERDF will again be available for investment in sustainable urban
development once the fund is done.
After servicing all three financing sources, there will still be said surplus of a good EUR 0.42 million or
1.4%. This means that the lowest goal of preserving the nominal capital has been achieved.
Thus, even when considering all interest, default and management costs, over the duration of the
CDF the fund capital grows by a nominal 0.06%. Including an annual inflation rate of 1.5–2.0% would
show that the fund capital is not preserved in real terms. Because of the difficult project portfolio, increasing the capital was not expected in the first place.
Under the given assumptions, there is a lot of value added to the ERDF or other resources relative to
granting “lost” subsidies. At the end of the fund duration, there is still EUR 20.42 million available, i.e.
more than the originally provided EUR 20.0 million (see Figure 60). It can be used for new integrated
urban or community development projects in the Saarland (even outside the fund). Moreover, according to the business plans submitted, the fund would not merely have provided financing to the
pilot projects but, according to the analyses conducted, also carried out all public interests at the
project level.
5.000.000
-5.000.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011 Jan
0
-10.000.000
-15.000.000
-20.000.000
-25.000.000
-30.000.000
-35.000.000
Figure 60 – Cumulative fund cash flows over the entire duration of business activity (in euro)
6.6 Additional opportunities to optimise future fund management
It should already be noted here that there are more opportunities to further optimise the implementation of the CDF in the Saarland. The future fund management of the CDF will play a crucial role in
this.
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In this regard, it is worth mentioning that increasing the participation profits and/or shortening the
repayment schedules would also improve the preservation of fund capital. However, this would
come at the cost of implementing the public interests at the level of the individual projects, as it
would only raise the cost of the project financing from the fund. It is this shift toward commercial
project financing, like that offered on the capital market, which should be prevented through the offering of the CDF. For this reason, nothing further is said about this option.
The same applies when the CDF financing is reduced to individual parts of the total investment
needs, especially for those projects which are currently planned to receive full financing from the
fund. In this case, the remaining financing would have to come from commercial sources. This would
raise the financing costs and limit or even jeopardise the achievement of public project goals. Even
extending guarantees from the fund combined with parallel lending from commercial banking partners would increase the financing costs at the project level, since the guarantee fees and the market
rate loan interest rates will not be lower than the currently assumed fixed rate of 2.0%. Moreover,
guarantees only offer a limited coverage of default risks for the financiers (up to 80%).
It actually seems better for the fund management to reinvest cash flows to the fund into new projects to thereby generate higher interest income and achieve additional public project goals. Furthermore, the funding of more short-running projects and smaller projects (instead of individual
large projects) seems to make sense due to the faster returns and lower cluster risks at the fund
level. The starting portfolio of the CDF only features long-running projects – the shortest project duration is 16 years – as well as considerable cluster risk from the Neunkirchen project, which accounts
for more than 60% of the total funding volume for the entire CDF. Herein lies the challenge to the future fund management in identifying suitable projects for financing by the CDF.
10.000.000
5.000.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
-5.000.000
2011 Jan
0
-10.000.000
-15.000.000
-20.000.000
-25.000.000
-30.000.000
-35.000.000
(alternative scenario 1: Reduction of management fees to 1.50%; in euro)
It would greatly improve the preservation of fund capital if the fund management fees could be reduced. Because dormant partner’s interests are being granted, which typically feature no independent, active management activities in the project companies, it would presumably be possible to lower
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105
administrative fees considerably, for example, by setting up a ministerial administrative department
(cf. details on governance models). Applying a rate of approx. 1.5% for the Saarland Community Development Fund results in a surplus of EUR 6.56 million (see Figure 61). In this case, the total net income is 21.88%, or nominal capital growth of 0.90% p.a. Again, this is not equivalent to real fund
capital preservation.
If the management fees were actually reduced, it would also make sense for the Saarland Community Development Fund to use other financial engineering instruments for the project types presented. The discussion regarding the various governance models raised the possibility that the CDF –
or a financial institution, if involved – finance the pilot projects through loans or equity in the form of
venture capital.
In the case of loan financing, the performance of the ExWoSt model projects for UDFs clearly show
that management fees of 1.50% are realistic when a financial institution is involved. Assuming this
rate and leaving the other premises for financing, durations and fixed interest rates unchanged,
means a slightly worse result for the fund from the pure lending scenario. The reason for this is the
fact that the fund no longer participates in profits and losses. Figure 62 on the alternative scenario
reveals that the fund surplus would be EUR 5.91 million or 19.69%.
10.000.000
5.000.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
-5.000.000
2011 Jan
0
-10.000.000
-15.000.000
-20.000.000
-25.000.000
-30.000.000
-35.000.000
(alternative scenario 2: extending loans to projects, management fees 1.50%; in euro)
As far as equity is concerned, i.e. investing venture capital, in all projects is assumed that the (proportionate) project cash flows replace the repayments from the project to the CDF. (In the case of
the Neunkirchen project, the cash flows are split with the private partners, each according to his
share). Leaving all other premises unchanged from the prior scenarios (incl. the lower management
costs) results in scenario 3 below (see Figure 63).
Although the ability of all of the projects to pay back the investment would improve in accordance
with the already detailed project cash flows, the surplus for the CDF would shrink minimally to
EUR 5.23 million. This is a surplus of 17.50% or annual nominal fund capital growth of 0.74%. Even
though this also “only” means nominal capital preservation at the fund level, the advantages at the
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project and governance level could justify the implementation of this form of project financing by the
Saarland Community Development Fund.
10.000.000
5.000.000
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
-5.000.000
2011 Jan
0
-10.000.000
-15.000.000
-20.000.000
-25.000.000
-30.000.000
-35.000.000
Figure 63 - Cumulative fund cash flows over the entire duration of business activity
(alternative scenario 3: investing venture capital (equity) in the projects, management fees 1.50%; in euro)
In contrast, this scenario considers charging higher fund management fees due to the doubtlessly
greater administrative needs. In scenario 3, up to 2.30% in management fees could be charged without putting the financial feasibility of the Saarland Community Development Fund at risk. Even with
these management costs, the full amount of capital is preserved, though there would no longer be
any nominal capital growth. Paying higher management costs appears to be necessary if venture
capital is invested, since active management support by the CDF via its representative(s) at the project level (e.g. in the executive or supervisory board of the project company) can be relevant .
In summary, the Saarland Community Development Fund would enjoy the surpluses listed below
based on the four fund calculation scenarios (including the starting situation). All four scenarios exhibit nominal capital preservation, which means the financial feasibility criterion is fulfilled under the
given premises for the projects and the fund (see Figure 64). From the purely financial perspective, in
principle the Saarland Community Development Fund could use all of the financial engineering instruments mentioned in the discussion (loans, equity and dormant partner’s interests).
Scenario
Starting values
Alternative scenario
1
2
3
Form
Dormant partner’s interest,
3% management costs
Dormant partner’s interest,
1.5% management costs
Loans, 1.5% management
costs
Equity, 1.5% management
costs
Fund Surplus
EUR 0.42 million
Nom. Capital Growth
0.06% p.a.
EUR 6.56 million
0.90% p.a.
EUR 5.91 million
0.82% p.a.
EUR 5.53 million
0.74% p.a.
Figure 64 – Comparison of nominal capital preservation in four scenarios for the CDF
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7
107
SUMMARY DETERMINATION OF NECESSARY IMPLEMENTATION STEPS
7.1 SWOT analysis: Added value of JESSICA instruments in the Saarland
The calculated model of the Saarland Community Development Fund shows that the revolving use of
ERDF funding as equity capital investments and, as the fund progresses, as loans is possible. Although
the cash flows needed for this from the identified pilot projects are tied to (in some cases) greater
risk, there are also possibilities to optimise the design and calculation of the fund model. Given the
shift in the focus of European funding to the new EU Member States and the related, very likely decrease in ERDF funding available for use in Germany, and thus for the Saarland as well, any lower
capital consumption by the fund would make it possible for the Saarland to finance urban development projects in future as well, since all capital returning to the CDF would be available for reutilisation.
This repeated use of returning capital is no longer subject to the guidelines of the ERDF regulations;
they only need to further the goal of sustainable urban development in accordance with Article 78(7)
of Regulation (EC) No 1083/2006.
Once the ERDF funding and its co-financing are deposited into the CDF, they count as disbursed.
Thus, there is no longer any risk that they must go back to the European Commission due to non-use
during the period stipulated by the N+2 Rule. The proof of disposition for the ERDF funding and its
co-financing is not due until the end of 2015, i.e. it is critical to invest them into projects and construction measures before that time. A look at the fund calculations presented in this study shows
that far more projects have to be identified at the start of the implementation stage than the five pilot projects in order to actually get all the targeted capital paid out (EUR 10 million ERDF +
EUR 10 million state co-financing).
The additional EUR 10 million in capital from the CEB loan to the CDF worsens the economic results
of the fund due to the payments of interest and principle and may seem unfeasible due to the allocation conditions described, but it has the undisputed advantage that this EUR 10 million is not subject
to the provisions of the EU and can thus be used in areas outside those presented above. For example, investment in housing could be funded with this capital, which would be excluded under the
ERDF regulations. This puts the CDF in the position to also fully fund mixed usage projects which are
important for central urban development policy.
In spite of periods of empty coffers, the funding activities of the CDF should stimulate public and private investment in urban development policy activities. This creates a leverage effect which far exceeds the amount of funding employed.
In contrast to issuing subsidies, which limits the public sector’s regulatory influence in a project to its
very start in practice, the use of JESSICA instruments means its influence on behalf of the common
good extends throughout the project. In the event of an equity capital investment, it can even participate directly in the profits.
The activities of the CDF also make it possible for the communities of the Saarland to raise the cofinancing needed for national and state funding projects in spite of their tight budgets.
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The following SWOT analysis gives another overview of the general advantages, disadvantages,
chances and risks:
Strengths:
•
Use of new funding instruments (equity, later loans as well) in urban development, which
makes other project types possible that were not able to use the existing grants.
•
The EUR 20 million in ERDF funding and its co-financing deposited in the CDF can be used
continuously and reused (revolving, sustainable and efficient usage).
•
After the first round, the revolving capital is not subject to ERDF provisions; twice-revolved
funds are not subject to any usage provisions after exit.
•
The use of funding with repayment conditions should also activate private investment in the
sense of the eligibility requirements of the CDF (leverage effect).
•
The repayment-based funding approach promotes project discipline and sustainability in
their preparation and implementation. Turning to banks for their competence in making the
funding decisions helps reduce the economic risks to the CDF (no “disguised” grants via the
CDF are possible).
•
Decreasing the N+2 problems as funding is considered disbursed once paid to the CDF.
Weaknesses:
•
The co-financing of the ERDF funding has to be financed from the state’s budget or through
an (interest-bearing) loan. The possible combination with federal or state funding when subsidising is not possible for deposit into the CDF.
•
The late start of the JESSICA initiative in the programme period means that all ERDF funding
is actually tied up in grant projects. ERDF funding can only be put into the CDF if the capital is
not retrieved in time by the targeted grant projects.
•
High administrative costs due to new funding principle; increased administrative costs from
involving banks and fund managers.
•
Mandatory proof of disposition for the ERDF funding and its co-financing at the end of the
programme period is still required and necessitates the complicated agreement between
funding recipients, fund managers and the responsible ERDF administrative agency. More
costs through separate accounting of the CEB loan.
•
Greater project discipline means more costs when applying for funding; project conception
must be more developed than earlier and already be in the financing planning stage, which
normally only has a small time frame.
Opportunities:
•
Against the backdrop of the geographic shift in European funding policy, additional funding is
secured for the coming programme period (repeated usage of funding in this programme period), thereby compensating for the expected drop in funding allocation.
•
Due to its revolving character, the CDF funding can also serve to co-finance future ERDF funding allocated to the Saarland.
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109
•
Since the business areas of the CDF represent the main requirements for action by the public
sector in terms of urban and community development, other goals for the common good can
be achieved as well.
•
In times of economic crisis, granted JESSICA funding can have a positive image effect (better
credit rating, project seen as more important...).
•
The activities of the CDF can increase the success in implementing the goals and content of
integrated community development concepts. By instituting a first loss provision for the public capital into the financing agreements on the CDF between the state and the fund management, higher than normal financing risks can be justified to initiate the funding of especially important urban development projects with great benefits for the common good.
•
ERDF funding and their co-financing can also be used to finance the fund management until
the end of 2015, which helps offset the upfront costs (project review and selection process).
This is not possible thereafter, since all funding must be financed by that date due to the
proof of disposition requirement. Because of the CEB loan, however, the CDF is not entirely
dependent on the project cash flows in 2016 to pay the fund management costs.
•
The capital from the CEB loan can also be used for projects which are ineligible under ERDF
provisions. This broadens the CDF’s range of action considerably. It can also fund important
projects by financing the eligible parts with ERDF funding and its co-financing and the ineligible parts with the CEB loan capital. This makes it possible to fund the entirety of mixed usage
projects which include, e.g. housing.
Risks:
•
The ERDF funding tied up in the CDF cannot longer be used for grants.
•
Together with the related co-financing, the ERDF funding deposited in the CDF must have
been invested in projects once by the end of 2015.
•
Utilisation of the CEB loan reduces the total economic performance of the CDF, since the interest and repayment have to be serviced.
•
The acceptance of greater project risks due to the first-loss rule for the public capital employed to enable greater common good effects might mean much wore financial results for
the CDF.
•
Due to the economic crisis and the generally tight budgets for the communities of the Saarland, the use of the JESSICA instruments improves the possibility of borrowing by private parties and municipalities beyond the range originally (2005) foreseen. However, this is a temporary problem.
•
The administrative infrastructure is not yet set up for the use of a CDF. The capacities needed
to administrate a fund can only be roughly estimated. Locating the CDF and its management
outside the direct influence of the state as financier is (still) viewed critically.
•
This evaluation study only reviewed relatively small projects as funding recipients. Though
the funding of larger projects (e.g. development the large brownfields mentioned) was not
analysed, it appears extremely practical.
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7.2 Review of advantages for various actors
From the perspective of the various parties involved in the implementation of the CDF or receiving its
funding, there are quite specific benefits beyond the general advantages listed previously.
Due to the integrated approach and focus on urban development, a multitude of projects can be
considered in principle for funding by the CDF. The range of potential project development broadens
significantly: in addition to subsidisation, public and private (in the sense of municipal companies)
managers now have the instruments of the CDF (equity and later loans as well). In practice, land and
real estate can now also be brought in.
Private companies do not directly enjoy funding by the CDF. By limiting the use of the JESSICA instrument to fund municipalities and municipal companies, private companies only benefit indirectly,
by being commissioned to construct or carry out the planned measures.
By overcoming the existing market failure, projects which have been successfully implemented using
CDF funding help improve the reputation and thus the image of those urban neighbourhoods or development areas. As community development key investments, the projects radiate their positive effect through the region and might thereby promote additional processes for sustainable economic
and social development. This could attract additional public and also private investment to urban development.
For the private finance sector, the consulting services, especially in regard to setting up the CDF, are
relevant. Classic areas of activities which might become more important because of this development are the preparation of project business plans for funding applications on the one hand and the
financial evaluation of these business plans on the other. The close collaboration between the banking institution managing the fund and the responsible ministries in the Saarland can directly benefit
the public sector because of the increase in financial know-how. Furthermore, there is the possibility
that these thoughts of profitability might influence the actions of other departments, which might
mean the corresponding changes to existing funding programmes in the long term.
7.3 Future potential for JESSICA financial engineering instruments in the Saarland
The study illustrates that the use of a CDF for the realisation of sustainable urban and community development in the Saarland is immediately practical. The current urban development policy problem
areas restrict the ability of the municipalities of the Saarland to act more and more, and private and
especially public investment capital is becoming increasingly scarcer. Against this backdrop, the
evaluation study demonstrates that more efficiently using the few public resources available for urban development not only achieves the goals of the public sector but even loosens the restrictions
on their ability to act. There is no great demand for the instruments of the CDF at present because,
for one, they are viewed sceptically or with reservation due to their novelty, and for another, the
tight financial budgets in the public and private sector mean that subsidisation is (still) the preferred
option, since the funding, once allocated, need not be paid back.
Nonetheless, it can be assumed that the demand for the funding instruments of the CDF will increase
considerably in future. If the downward trend in the financial flexibility of public and private actors
continues, grants as a “competing project” will no longer be used as much as now because of the
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111
general scarcity of capital. In addition, this will increase the importance of the JESSICA instruments as
a possibility for co-financing the grants.
Moreover, because of the setup of its business areas, the CDF promotes measures in the central
problem areas of urban and community development in the Saarland. Functionally problematic urban centres such as in Lebach, which discourage private companies from the retail and gastronomy
sectors from settling in the area, can also be found in many other communities in the Saarland. Successful revitalisation through the intervention of the CDF might serve as an effective role model for
other communities.
The two infrastructure-related projects in Dillingen and Nalbach represent investment in the future
of technology which will improve the general location factors and, at the same time, decrease the
costs for maintaining the infrastructure. This will actively help overcome exactly the problems which
are becoming very important to the communities of the Saarland due to demographic and global
economic developments.
Through the support of the CDF, the project in Neunkirchen also helps to solve one of the common
problems in medium-sized cities: Attracting a hotel is urgently needed for the city and environs for
economic and structural reasons; however, this usually fails due to the lack of an operator. This problem cannot be solved through a grant but requires the revolving instruments of the CDF. In addition
to meeting this structural need, implementing such a project opens up the possibility for the community to tap into tourism potential as is frequently recommended medium-sized communities in rural areas do through land-use plans, as well as overall and developmental concepts.
The need to restructure inner city problem areas, as in Ottweiler, is also shared by many communities in the Saarland. Necessary investments are frequently waiting which generate financial cash
flows at the end of their development but which the municipality is unable to handle due to their
large volume. The expected project returns are not high enough for private investors, and the development risk is too high for banks as potential lenders. In such constellations, the CDF is the only effective instrument.
7.4 Summary and recommended plan of action
Based on the findings of this evaluation study as presented, it is recommended that the Saarland sets
up an urban development fund. An implementation model has been developed for this and the legal
framework has been laid out.
The approach described as the “Nexthouse” model and agreed upon by the responsible state secretary foresees the establishment of the CDF as a subsidiary of the state-owned Strukturholding Saar,
which grants dormant partner’s interests (and thus equity capital) to projects. The fund manager will
be delegated by a state ministry (presumably the MES, to benefit from sharing know-how with the
ERDF administrative agency) via management contract to the fund company; the decisions whether
to fund a project will be prepared by external consultants and taken by the fund management in
agreement with an interministerial advisory board (with representatives from the MEET, MES and
Ministry for Finance). This decision-making system is important; especially should the approach be
expanded. In a second step, the fund company conducts a tender procedure to find a private partner
with a KWG-compliant banking license to join it. This would make it possible for the CDF to also ex-
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tend loans, while still maintaining the influence of the state on the funding decision via the advisory
board.
Notwithstanding the final decision regarding the structure of the Saarland Community Development
Fund and its use of instruments, all JESSICA instruments show positive funding effects on the projects.
The following are the further steps recommended to the Saarland for implementing the CDF16
(see Figure 65); more detailed information on the particulars of the expanded equity capital model
(granting venture capital), which is not deemed unlikely from today’s perspective, can be found in
the annexes on page 118ff.
Equity Capital Model
1.
Fundamental decision of responsible ministries regarding the setup of the CDF
2.
Decision on a business model (see the example business plan on pg. 113)
3.
Commitment of responsible ministries to deposit capital in the CDF in regard to
a.
the ERDF funding, from the diverse priority axes,
b.
the co-financing from the state from the budgets of the responsible ministries, and
c.
accepting the loan offered by the CEB.
4.
Establishing a fund company by the state (articles of association, participation agreement). Arrangement depends heavily on participation of private parties at the fund or project level, including investment principles, risk-return distribution, first loss, tax optimisation, exit)
5.
Public announcement that CDF will be set up (e.g. via funding programme– see pg. 112 – or bulletin)
6.
Financing agreement between state and fund management or CDF
7.
Central informational event for the municipalities and municipal companies
8.
Review of first project applications by the responsible ministries and then the fund management
9.
Structure the legal foundation for individual project funding (funding agreements, loan agreements)
10. Carry out due diligence for the projects
11. Authorise equity capital investments of CDF for accepted project applications
12. Enter dormant partner’s interest agreements, implementation dependent on legal form of concrete
project
13. Transfer the money for the equity capital investment to the project
Figure 65 – Additional steps to implement discussed model for the Saarland Community Development Fund
16
As agreed in the contractor’s agreement dated 2 March 2009 and the 1st addendum dated 30 November and 7 December 2009, Service Area 6, an implementation time table will be compiled based on the chosen fund model, governance structure and the de facto target group of the CDF.
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113
ANNEX 1: POSSIBLE COMPONENTS OF A BUSINESS PLAN FOR THE CDF
The following is an example business plan for the Saarland Community Development Fund (CDF) in
accordance with Article 43(2) of Regulation (EC) No 1828/2006, as it would have to look to implement the Nexthouse model.
Purpose: Use of ERDF funding to finance projects
The provisions of the funding agreement determine the use of loans, guarantees and equity capital
investments. During the initial stage of the CDF, only dormant partner’s interests will be made; investing venture capital and extending loans, and perhaps guarantees as well, is not possible until the
cash flows from the first lending to the project return to the fund.
Projects should be funded which meet the criteria to be eligible for ERDF funding and which have incorporated an integrated community development concept. They will then be classified under one of
the four business areas of the CDF (Urban Development – Local Business – Infrastructure and Environment – Brownfields).
The projects applying for funding will then be reviewed by the responsible ministry. Which ministry is
responsible is determined by the classification of the project goals under the relevant priority axes of
the Operational Programme ‘Saarland’ for the current programme period. The main criteria in terms
of eligibility for funding are:
•
Integration in urban development and urban planning;
•
Fulfilment of Operational Programme requirements.
The second phase of project review is then done by the fund management, which bases their review
on the following criteria:
•
Examination of project cost effectiveness and project risks (incl. amount of expected project
revenues and expenses over the entire project duration; ability to cover debt service; securities in the project; complementary financing elements (including possible investment grants
outside the fund); quantification of project risks for the CDF).
•
Projected target groups for funding by the CDF are initially municipalities and municipally
dominated mixed-sector project managers. At a later point in time, the funding of privately
dominated and pure private sector companies is possible.
•
The concrete arrangement of project financing will be determined by the business conditions
and/or funding guidelines of the fund.
The fund management as equity capital investor makes the funding decisions based on the projectrelated credit rating of the funding recipient. It is possible to take on more risk than this creditworthiness justifies (to fund projects which are especially important for urban development policy), if the
financing agreement between the state and the fund management stipulates a “first loss clause” for
the public allocations to the fund.
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Budget and outflow of capital
The CDF will start with a volume of EUR 30 million.
Source of capital:
•
EUR 10 million in ERDF funding
•
EUR 10 million in national grants from the state budget
•
EUR 10 million from a CEB loan at the conditions shown in Chapter 6.2.
Additional capital should be deposited in the following years. With the availability of additional national capital, it should also be possible to turn to additional, inexpensive loans from development
banks (e.g. SIKB).
Depending on the status of the selection and preparation of projects, the aim is to authorise and pay
out the entire fund volume by the end of 2015.
Moreover, the goal is a revolving use of capital, i.e. the fund management would like to preserve
100% of the capital employed, at least in nominal terms.
Co-financing partners, ownership structures and legal foundation
The CDF will be established as a new company owned by the Saarland. The fund management will be
taken over by an administrative department at the MES created for this purpose.
The ownership structure is set down in the administrative agreement, in terms of capital paid in and
the revenues generated. The ministries participating in the setup (depending on the priority axis in
play) deposit the corresponding ERDF funding and the state co-financing into the fund. The CEB extends the aforementioned loan to the CDF.
Fund management
The administrative department at the MES takes over the administration of the fund. It updates the
proof of disposition, administrates the dormant partner’s interests and decides how to invest the
CDF capital. It is responsible for:
•
The final application review and project evaluation (defining the catalogue of criteria, compiling a scoring model to prioritise the projects should the demand exceed the supply of capital)
•
The final decision on whether to grant dormant partner’s interests (and other financial engineering instruments at a later time) from the CDF
•
Development of funding guidelines wherein the conditions are set (duration, repayment
schedule, interest rates) under which the dormant partner’s interests will be granted.
•
Examination of disbursement requirements
•
Control of the CDF (monitoring projects, mandatory reporting, analysis of long-term impact).
The state ministries have no costs for reviewing the content of the project applications. The fees for
external financial and other necessary consultants will be set in the financing agreement between
the state and the fund company.
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Verification of the disposition of the Operational Programme funding (ERDF funding + state cofinancing) remains the responsibility of the ERDF administrate agency until the end of 2015. The fund
management shall supply the agency with the proof of disposition.
Justification for the use of ERDF funding
In the Saarland the EU Commission’s JESSICA initiative is being actively pursued and implemented according to the local conditions. The following goals have been set:
•
Set up a revolving fund for integrated, sustainable urban and community development projects beyond the end of the current ERDF Structural Fund programme period
•
Increased consideration of cost effectiveness of funded projects
•
Mobilisation of additional public and private capital for integrated, sustainable urban and
community development
For the 2007-2013 programme period, a total of EUR 68.547 million is available to the Saarland under
priority axis 3 for sustainable urban development. Of this amount, EUR 10 million will be fed into the
CDF in the initial stage. Over time the fund volume should be increased.
To date funding with ERDF funding has been concentrated exclusively on granting subsidies. The CDF
is a new funding instrument to supplement the current offering.
The returns from the projects should be reinvested into new projects, whereby the CDF will gradually
broaden its spectrum of funding instruments to include venture capital investment and loans. The returns from the project will be used in accordance with the guidelines in Article 78(7) of Regulation
(EC) No 1083/2006 for urban development projects or SMEs. It is planned to use the capital for urban
development projects in the area of the Operational Programme ‘Saarland’.
Conditions for the CDF to exit projects
In the notifications of allocation from the fund management, the funding recipients shall be obligated
to note and comply with all relevant ERDF regulations regarding the restrictions and additional provisions. The banking institution reviews compliance with these guidelines in its role as fund manager.
Should individual projects be found in violation of the relevant national and ERDF regulations to an
extent which requires the ERDF funding not be granted or be reclaimed in full or in part, this will be
enforced by the fund management in the manner foreseen by administrative law.
Reclaimed capital returns to the CDF and is thus available for funding other projects within the scope
of integrated, sustainable urban and community development.
Provisions for winding up the CDF
The existence and effectiveness of the CDF should be ensured over the long term; any adjustments
necessary for this can and should be undertaken. Regulations regarding any liquidation of the CDF
are part of the financing agreement.
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ANNEX 2: KEY POINTS OF A FUNDING PROGRAMME
•
Occasion for funding
ERDF Regulation/Operational Programme
•
Object of funding
Projects which
•
Legal foundation
•
Funding goals and principles
•
Cannot be implemented due to market failure but
could generate revenues,
•
Are part of integrated community development
plans,
•
Are eligible for funding according to the ERDF regulations and Operational Programme.
Priority axes of the Operational Programme
Business areas of the CDF
•
Funding recipients
Municipalities
Municipal companies
Later private sector companies as well
•
•
Project selection criteria
Eligibility for funding
(cf. page 117)
Contents in concordance with funding goals and principles
Application and selection procedure
Implementation
Decision of fund management on dormant partner’s interests
Change applications
Interim and final proof of disposition – retention periods
Disbursement/repayment
•
Type, scope, amount of funding
Funding instruments used
Expenses eligible/ineligible for funding
Possibilities of combining with subsidisation
Beneficiaries’ own capital
•
Repayment to CDF
Conditions
Revenues/collateral
•
Other provisions
EU guidelines (disclosure)
Catalogue of beneficiaries (transparency)
Controlling/reporting
•
Participants in the implementation
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ANNEX 3: POSSIBLE STRUCTURING GUIDELINES FOR PROJECT APPLICATIONS
1.
Name of project
2.
Short description of project
Current utilisation structure
Ownership structure
Building law situation
Structural policy goals for and importance of area
Future land usage
Parties involved in project development
Plans for funding
3.
Project stage
In the planning stage
In the implementation stage
Already complete
4.
Project type
Development of new land or brownfields
Financing interim acquisition of land/buildings (no own development)
Structural engineering measure – renovation/new construction
Structural engineering measure – external stimulus
Financing utilisation stage of land/buildings
Non-real estate-related activities
5.
Project data
Duration of project
Investors, project managers, relevant actors
Existing plans and expert opinions (e.g. feasibility study, integrated action concept)
Draft of business plan based on cash flows (with project managers)
6.
Classification of risks
Database of cost estimates in business plan
Project stages when JESSICA funding will be needed
Revenue estimates: timing of returning cash flow, break-even point, certainty of income forecasts etc.
Assessment of demand (utilisation)
Planning risks
Risks of contamination and other incalculable risks
7.
Eligibility for funding according to ERDF regulations
Yes
No
Classification under priority axes of the Operational Programme
8.
Planned types of financing (JESSICA funding)
Loans
Guarantees
Mezzanine or hybrid financing (debt/equity mezzanine)
Venture capital
9.
Regular and aerial photos and plans
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ANNEX 4: VENTURE CAPITAL FUND
Purpose: Use of ERDF funding to finance projects
The provisions of the funding agreement determine the use of loans, guarantees and equity capital
investments. During the initial stage of the CDF, in principle only dormant partner’s interests will be
made; extending loans is not possible until a private partner with a banking license has been found.
With the private sector know-how gained thereby, investing venture capital would then be a further
development step.
The ERDF funding would be invested as venture capital by the CDF in the form of a venture capital
fund. The arrangement of the fund would fundamentally reflect the classic elements of private equity/venture capital funds. In the following, a differentiation is made between the fund level and the
actual participation or investment level.
Fund level
The design elements differ depending on whether private investors should participate at the fund
level and on the legal form of the actual legal entity. To be determined in any case are:
•
Investment principles to follow when investing
In case already identified projects are cancelled, but also for future participation on additional projects, it is necessary to lay down certain investment principles, as is typical of blind
pool investing. These investment principles should include the investment criteria to be fulfilled by each project to be invested in. In addition to the funding-relevant provisions
[EU/Operational Programme], the projects must meet certain financial and legal evaluation
criteria, such as those used for the selection of the pilot projects as presented in Chapter 5.2.
From the risk participation perspective particularly that of the private investors, it comes
down in the end to the risk-reward profile based on the portfolio compiled according to the
investment principles. The investment principles also include the non-negotiable participation conditions – see the following section on the Investment Level for more details – to be
complied with at the investment level and which justify rejecting a project.
•
Distribution of risks and returns
The regulations in this segment reflect the revolving character of the funding. In regard to
the returns on the ERDF funding, Article 78(7) of Regulation (EC) No 1083/2006 stipulates
their retention and reuse for UDFs or SMEs. In contrast, private investors link funding on the
expectation of generating risk-appropriate returns in order to receive these as profits, which
they may do in accordance with the second COCOF Note 08/0002/03-EN, Point A.317.
•
First Loss
Particularly to establish an incentive for attracting private investors, one should consider
making the ERDF funding the first loss piece. That is, this capital would have the lowest pay-
17
“Any private contribution to an operation or a financial engineering instrument should be returned to the private entity …”.
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ment priority, being the last paid when profits are generated or the first loss – in part or full –
if there is a loss.
•
Exit
Capital in the private equity/venture capital segment is typically invested for 5 to 7 years, at
the end of which there is a profitable exit. This is principally done using an initial public offering (IPO), whereas a so called trade sale will be used to disinvest from the projects here.
These regulations are normally set down in the partnership agreement. Ancillary agreements are also
possible. The aspects here can be similar to those at the investment level, since the private investors
will also be concerned about these issues at this level.
Investment level
The conditions for participation are usually laid down in the partnership agreement and normally in
the participation agreement and shareholders’ agreement. The important points of regulation here
(differing according to the legal form of the project company) are:
•
Partnership agreement
o
Advisory board (perhaps with participation of private investors)
The CDF can delegate its own or other people to the advisory board. This representation on the advisory board is a way for the CDF to control the arrangement of the advisory board’s powers, e.g. by withholding consent. Regulations on the right to more
information from management are also typical. In this manner, errors at the project
level can be avoided beyond the rights of the CDF as investing partner. In particular,
large private investors can thereby gain a greater measure of security for their investment. The detailed regulations on the rights and duties of the members of the
advisory board are also set down in the bylaws for the advisory board.
o
Management
Principally, the CDF as an investor will not participate in management. To nevertheless be able to exert control, it is possible and usual to stipulate in the partnership
agreement that the management must get the agreement of the CDF and the investors – perhaps via the advisory board – before acting in certain areas. Areas where
the management must act quickly are excluded from this for reasons of practicability.
o
Partner resolutions
Regardless of the legal form, the partners’ general meeting is the supreme body of
the project company, responsible for making fundamental decisions. The more investors there are – aside from the CDF – the more relevant it is to work out the fundamental regulations, because these can be the basis for all decisions.
o
Inclusion
In regard to taking on additional investors, especially if the CDF itself is only a minority shareholder, attention must be paid that the inclusion rules, coupled with the cor-
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responding settlement rules upon exit, cannot be used against the CDF but rather
serve as the last resort.
•
Shareholders’ agreement
This is where the CDF as partner and the project partners can set down their future legal relationships beyond the partnership agreement. Such issues are regulated here which – depending on the legal form – need not necessarily be regulated in the partnership contract or
which the partners do not wish to make public. The concrete arrangement depends on the
legal form of the project company and the negotiation situation.
o
Drag along rules
Such regulations enable the CDF as investor to exit the investment with a profit if –
as part of a trade sale – investors can be found who are interested in taking over the
shares as well as those of the other partners. Due to the relevant (drag along) regulations, the other partners would then be obligated to sell their shares. This rule is frequently set down in the partnership contract, like the tag along rights and preferential rights listed below.
o
Tag along rights
This is the flip side of the drag along rules. If a partner sells its shares, the other partners have the right to obligate that partner to sell theirs in the same transaction.
o
Pre-emption rights
Pre-emption rights (also known as rights of first refusal) enable the CDF to control
whether other partners are accepted into the project company. Undesirable partners
can be prevented from forcing their way in by exercising pre-emption rights. If the
CDF does not wish to purchase the shares itself, it can exit the investment completely by exercising its tag along right.
o
Exit strategy
It is a good idea to set down the means of conducting an exit which go beyond the
partnership agreement – rights of disposal of shares, resolution to dissolve etc. – in
an exit strategy, e.g. when this is foreseen etc.
o
Liquidation preferences
The CDF can hereby ensure better proprietary conditions upon liquidation of the project company. A typical rule is double dipping, whereby the investor, after removing
its share of the revenues, also gets a part of the remaining profit. The revenue benefit is composed of the contributions, additional payments and a spread. The liquidation preference also applies to processes similar to liquidation, such as the disposal
of majority shareholdings, restructuring etc...
o
Voting rights/Rights to information
The right to information and voting rights beyond what is legally stipulated can be
set down in the partnership agreement, especially in regard to financial figures. This
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can take the form of an agreement to reveal the figures which would be compiled in
any case as well as explicit additional reporting.
o
Binding present management
The provision of funding may not be useable by project partners’ management to
gain wealth through the quick and profitable exit from the company. In order to prevent this, binding instruments are necessary such as holding periods and compulsory
redemption.
•
Participation agreement
In order to keep the additional regulations relevant to cooperation– partnership agreement/shareholders agreement – separate from the agreements relevant to the entry of the
CDF into the investment, the CDF can set the latter down in a participation agreement with
the project partners, as is not atypical. The following points are usually regulated.
o
Capital increases/Initial valuation
The entry of the CDF into the project company can occur by taking over the share of
a project partner or through a capital increase. In both cases, an initial valuation of
the project company is required to calculate the share of ownership held by the CDF.
If the project company is unable to deliver any meaningful valuation indicators, this
is to be based on the discounted future value. It can already be foreseen at this point
that the CDF will increase its participation gradually over several capital contribution
rounds depending on certain milestones being reached.
o
Milestones
The CDF can use milestones to mark the achievement of certain goals on which additional financial or funding commitments rely. These can be certain figures (sales etc.)
or factual goals (construction phases and the like). This shall be formulated with particular care to avoid disputes.
o
Anti-dilution/Ratchet
Should additional investors be interested in buying themselves into the project company, it might happen at that time that the enterprise value of the company has
fallen, so that the investors are able to buy in more cheaply, thereby diluting the
shares held by the CDF. In order to prevent this, it is recommended to work out an
anti-dilution clause, whereby the selling project partner surrenders some shares free
of charge or the protected partner(s) exercise subscription rights at the nominal
value. In this manner, the CDF can set up the situation as though it had also first entered under the less expensive conditions (“full ratchet”).
o
Guarantees to project partners
Particularly when the project company is unable to deliver any meaningful valuation
indicators due to its lack of current account and the valuation must be conducted
based on the discounted future value, it is essential to the CDF that the project partners take on guarantees for the relevant indicators. These might also refer to points
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which were or are relevant within the scope of the due diligence. The guarantees
could affect the financial situation of the company, for example.
Participation is typically preceded by:
o
Letter of Intent –
That is, the nonbinding agreement of intent in which the CDF lays down the main points for
continuing and the arrangement of later contractual commitments –,
o
Nondisclosure Agreement –
This is especially relevant for the project partners, since and insofar as their project contains
particularly confidential information. It is also critical that such shared information remain
confidential even if the partners do not come together –,
o
Due Diligence –
This is particularly relevant to property and environment due diligence, i.e. the careful examination of the property and environmentally relevant points in the project company, especially those with inherent risks and which must be considered as the contracts and valuations are undertaken.
In addition to the direct participation in the existing project companies, it is also possible to participate via a holding structure, for example, when there are or when it makes sense to have several project companies. In this case, the project partners put their shares in the project companies into a holding company in which the CDF participates.
Overall, the arrangement depends strongly on the concrete projects, so that the preceding information only offers a rough guide. In particular, the tax aspect of fund design, of which nothing
further is said herein, depends very strongly on which type of private investor is to be attracted.
Working out the various contracts and the balance of interests to occur therein offers an excellent opportunity to take an intensive look at the planned course of the investment, which is especially necessary to keep the inherent risks as low as possible.
12.8.2010

JESSICA Evaluation study for Saarland

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